Buying a Car With No Credit

I have a son who just turned 21. He does 3D design professionally and makes $19 an hour. Not bad for a first gig. And he lives cheaply.

He has about $6k in the bank and hasn't ever used credit. In America that means he does exist:-)

Now he needs a car and to do it he wants to take out a small loan. I haven't ever been in this position so I turn to THE internet information well of GRM.

I assume he can get financing from a dealer yet he wants to get pre-approved from a bank in case we find a car at a low end used car lot or a private seller. He called his bank and they said nope. So deep well of all things what is your insightful advise?

Thank you for your time

Hmm, well first things first, he needs a credit card. I've been using one for every single purchase since age 17, and as a result I have really good credit. Pay it off every month, and collect rewards points. I've never paid a dime to a credit card company, but I get a few hundred dollars a year in rewards points.

Since he didn't do this, he either needs to wait a year or so and build some credit (I'm assuming that isn't an option?) or get you to co-sign the loan with him. Have you talked to the bank about that?

Buy a $2k-$3k car with cash, continue to bank money and go to your local credit union or bank to start establishing credit with a fairly basic, low-limit credit card. Put a tank or two of gas on it every billing cycle and use auto-pay to make sure every payment is on-time.

With no credit history, he's probably only going to be able to get a loan with a co-signer, and that's bad ju-ju.

No credit but clean 1 year job history he is golden at a dealership. If he has had a decent history with his bank or credit union they will do it as well.

Cars are the least defaulted on loan in the united states so banks will take risks on a zero credit history but not crappy credit history.

i built my credit up and built up goodwill and personal relationshops with a couple of small local banks via a series of small ($1000 or so) personal loans. i never had a credit card, but managed to have a credit score in the high 700's (forget the exact number) when i bought my house 8 years after starting out as an adult. for me, a 10 year old car is "new", and i think the most expensive car i've ever bought was a 93 Lumina i paid (financed thru the dealer) $10k for in the winter of 96/97...

wearymicrobe wrote: No credit but clean 1 year job history he is golden at a dealership. If he has had a decent history with his bank or credit union they will do it as well. Cars are the least defaulted on loan in the united states so banks will take risks on a zero credit history but not crappy credit history.

Beware of interest rates, though. They might be stupidly high. Rather than co-sign, you might lend him the money and let him build credit through credit cards the way others have suggested. Make it official, though. Have him sign a note (get a form in the internet), charge him interest, and set a regular payment. Make it an exercise in discipline.

My only experience is when I bought my first (and only, as it happened) new car myself many years ago. I essentially had no credit yet, so the bank wanted me to have my parents co-sign on the loan. As it happened they finally agreed that wasn't necessary, but the point is I assume banks still do that sort of thing. Are you in a position to help him out in that regard?

My goodness those people who sell debt sure have effective marketing campaigns!

My first car loan was co-signed by my mother. I made the payments. Now that I think about it, this was before I had my first credit card.

Everything I have read warns against co-signing a loan as it could have a very negative effect on relationships. I love my son and I would hate money get between us. Further if he does run into issues it effects my credit.

Thanks so much!!!

I had a Best Buy CC and I paid it off over a year or so and it raised my score like crazy. I went from nothing to being able to buy cars at a low APR.

Sultan wrote: Everything I have read warns against co-signing a loan as it could have a very negative effect on relationships. I love my son and I would hate money get between us. Further if he does run into issues it effects my credit. Thanks so much!!!

as someone who has worked in the repo business, I would say follow the advice you've read. I will never co sign on anything for my children. It's not worth the damage it could do if something were to go wrong

ronholm wrote: My goodness those people who sell debt sure have effective marketing campaigns!

Agreed. Pay with cash.

"Envelope full of money" was the first thing that came to mind when I saw this thread title, too. A lot of places will underwrite a loan if he's had the job for at least a year, but with $6K at the bank, I don't think he needs a loan.

dabird wrote:

Sultan wrote: Everything I have read warns against co-signing a loan as it could have a very negative effect on relationships. I love my son and I would hate money get between us. Further if he does run into issues it effects my credit. Thanks so much!!!

as someone who has worked in the repo business, I would say follow the advice you've read. I will never co sign on anything for my children. It's not worth the damage it could do if something were to go wrong

While it's ultimately your decision, the only way I could see something going wrong is if there is a lack of trust and communication between the parent and child as well as if the co-signed amount is for more than the parent could reasonably afford.

When my mother co-signed for my first car (truck) loan, I actually did get laid off a year before the loan was finished. However, I was able to file for unemployment and found another job and thus was still able to make the payments. Either way, if I had needed help, I would have asked for it. Three and a half years later, when I got a better job and applied for another loan, I didn't need a co-signer.

A young single guy who I assume has no kids and isn't freakishly tall, I say pay cash for a used Miata. You can probably pick up a decent example for $2,000-$3,000 and have enough for repairs and snows, if you need them in your area.

Small, fun to drive, cheap and easy to maintain and they seem to be quite reliable.

Or, if he doesn't mind a bit of brash crudeness, he could snag an SN95 Mustang for about the same amount of cash but he may need to budget a bit more for rear tires.

MadScientistMatt wrote: with $6K at the bank, I don't think he needs a loan.

This, factor in insurance, maintenance etc. and don't shoot the whole wad.

And start the CC and credit building.

I too will mimic the ideas set forth by others.

I have to make some assumptions here that are unclear.
If he is hoping to use the $6k as down payment and then borrow the rest...
Instead, buy a $4k car, budget $1k for immediate repairs or upgrades, leave $1K in reserve for life's challenges.
Now, with that car paid, have Jr continue to make $300 per month payments into a savings account. This $300 (average car payment) will go into a fund that will pay for any other future car repair needs.
I assure you, that if bought right, Jr will never spend the entire $300 per month. Sure, there may be a future $900 repair but you wont run into that repair need ever three months. That means, Jr will be saving money toward a future car. If this means he net-saves $200 per month, he will have another $2400 save by the end of the first year; $4,800 saved in two years. If that car he bought for $4k plus $1k in immediate repairs = $5k is still worth $2k, he now has $7k when he sells this car. More than all his money back.

Lets not forget, for the past two years, he has now driven a car that needed nothing. That is to say that every time it needed a repair, he got it fixed right away because he had the money on hand to fix it. This statement is to negate the people who say, "I want a newer car (and payment) because I don't want to have to come up with the cash for unexpected repairs." Guess what, even cars with warranties have maintenance needs which are not covered by the warranty.

Here is the similar story via pretty graphics from Dave Ramsey. Similar idea but in this version there is no consideration for car repairs.
http://www.youtube.com/watch?v=BKyV8CTHeJ0

Agreed, he does need to build credit and prove that he can successfully play the credit game. I agree with others, this can be done other ways than an initial, co-signed car loan.

Buy a new $12k Mirage with $5k down payment and whatever bank he is with is going to loan him that last $7k. Make sure that they know he has a down payment and you should be fine for more.

Datsun1500 wrote: He could also put $5000 into a cd at the bank, then take a $5000 loan against that. It builds credit, keeps the rate down, and is his name only. This assumes he wants a $5000 or less car. He might not need a loan, but he should at least build a little credit in case he wants to buy a house later

This. Even if you have the money, play with someone else's while using your money merely as collateral.

Sultan wrote: I have a son who just turned 21. He does 3D design professionally and makes $19 an hour. Not bad for a first gig. And he lives cheaply. He has about $6k in the bank and hasn't ever used credit. In America that means he does exist:-) Now he needs a car and to do it he wants to take out a small loan. I haven't ever been in this position so I turn to THE internet information well of GRM. I assume he can get financing from a dealer yet he wants to get pre-approved from a bank in case we find a car at a low end used car lot or a private seller. He called his bank and they said nope. So deep well of all things what is your insightful advise? Thank you for your time

time to change banks

seriously, I've never know a bank that wouldn't float a loan to one of their own customers (interest rate might seem a bit high) … especially if there is some sort of collateral (as in a car with collision ins coverage)

I'm in the same boat as your son, 22 and no credit whatsoever. I've bought all my cars with cash and even have a prepayed cell phone. Unfortunately, I'm gonna need some credit one day so I'm looking into a lot of these options as well. I plan to get a low limit credit card to use for gas and just put the cash I would have spent aside for the payments. Also, I have a few family friends who are or were in the car dealing business and they said most big dealerships are willing finance for a "first time buyer" with proof of decent income if the majority of the car is payed for with a down payment. The interest rates are higher, but I sort of just see it as the cost of credit.

My parents have incredibly bad credit, so they can't help me with a cosigning of any kind.

Sultan wrote: He called his bank and they said nope.

Another thought: maybe he should visit the bank and talk to someone face to face...it may be they just shrug off phone calls, and wait for people who are serious to actually come in.

stuart in mn wrote:

Sultan wrote: He called his bank and they said nope.

Another thought: maybe he should visit the bank and talk to someone face to face...it may be they just shrug off phone calls, and wait for people who are serious to actually come in.

It doesn't matter whether it was in person or over the phone. Regulations do not allow banks to shrug off phone calls when people call asking for loans.