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What Kind of Auto Terms Should I Expect if I Have No Credit?
For some potential car buyers without a solid track record of paying off credit, lenders may stick to tougher auto loan terms for investing in a debt such as an auto loan. To some, it may seem counter-intuitive. After all, a lack of credit can simply mean that an individual has never had to borrow money. But lenders generally don’t see it that way. A lender offering car loan rates wants to see a history of borrowing, because statistically, this demonstrates a better chance of a return on the loan. Without a credit history, lenders may require some additional safeguards for their side of a car loan agreement.
Income Standards
Without seeing a credit history for a borrower, a lender tends to be stricter about requiring the borrower to have a high income. A higher income is another statistical advantage, where a borrower who makes a lot of money is more likely to be able to repay the loan without any trouble.
Higher Interest Rates
Another very common feature of a no credit car loan is a loan agreement that includes much higher interest rates than one for a standard credit-carrying customer. The interest rate is the price of the money you borrow. It represents the profit that the lender makes on loaning you money to purchase a vehicle. The methods for calculating compound interest are complicated, but it’s important to know that a 6.0 percent interest rate on a $20,000 loan does not mean that you will pay 6 percent of $20,000 in interest. Interest is compounded annually, but subdivided daily.
Basically, it continually compounds on itself. To use the last example, a 6.0 percent rate on $20,000 will cost you the better part of $7,000 in interest. Thus, the lower the interest rate, the less costly the loan is. To get the lowest interest rate from a lender requires exceptional credit worthiness.
By shopping around, you may be able to find “no credit” car loans that offer decent rates, not astronomical ones. Be sure to look into a variety of no credit car loan agreements so you’re not getting taken advantage of by a lender who wants to pad their pockets by offering sky-high interest rates to high risk borrowers.
Loan Principal
The principal of an auto loan refers to the amount of money that you borrow from the lender. This could be any amount of money and is used to purchase your new or used vehicle. It represents the bulk of what you must pay back to the lender but it’s not the total amount. Interest is calculated according to an annual percentage rate, increasing the total you must pay back in the time given. Since interest is how the lender makes their profit, most loans are structured so that the interest is paid back first. After the bulk of the interest is paid back, you start to pay on the principal.
Compare Loan Terms
Although you won’t be able to get the exact terms for more than one loan (unless you authorize lenders to run your credit report more than once), you can get rough estimates of the loan you’re taking out. If the principal is identical, compare the loans based on interest rate, how much time you have to pay it back and the hidden terms of the contract. In so doing, you will be in a good position to pick the best loan.
Auto loan terms range from 24 to 84 months in most cases. 48 or 60-month terms are common on pre-owned vehicles. If you prefer to trade frequently, a shorter term and larger monthly payments can help prevent negative equity. If you are confident you will keep the vehicle for years, consider a term up to 72 months but be prepared to owe more than your vehicle is worth for the first few years. An 84 month is considered for specialty vehicles or in cases where extreme negative equity is being financed. Many banks will not consider 84 month loans.
Down Payment
The historical rule has been to put a down payment equal to 20 percent of the selling price of the vehicle. While this ensures instant equity in the vehicle and can get you a better interest rate, it is not always necessary. Rather than making a larger down payment at signing, you can choose to make double or triple payments toward the principal balance. You should put a lower down payment if you have a low- or no-interest loan, as being able to take a low-interest loan allows you to borrow a bank’s money and use while you can invest your money in higher-yield accounts.
Prepayment Penalties
Some lenders will charge a prepayment penalty if the balance is paid in full before a certain number of months pass. Prepayment penalties are generally small (generally around 1 percent of the financed amount), and loans with prepayment penalties may have lower interest rates.
Credit Building Requirements
For someone with no credit history, building a basic credit history is often as easy as taking out a credit card and paying it off for several consecutive months. In a potential auto loan deal, a lender might suggest that a borrower follow this strategy, to make their no credit situation into a decent credit rating that offers a low risk assessment. This is critical for a lender who has to “go by the books” and only offers decent car loan arrangements to customers who present a good low risk rating.
Repossession Hardware
Another thing that lenders might do for no credit car loan borrowers is to offer a loan agreement that makes repossession easier in the case of default and nonpayment. New technology provides some options making it easier for a dealer to take back a vehicle when the payments are not coming in. In the old days, a human repossession team went to an address to collect a vehicle whose owner was late on payments. Today, a dealer or other lender can install an engine immobilizer device and switch off the vehicle’s engine remotely if payments are not being made. This cuts down on the costs for multiple loans in default, and allows the lender to offer some better terms to higher risk borrowers.
