What Are Auto Loans Without Credit Checks?

Typically, when applying for a loan, the potential lender performs a credit check (sometimes called a credit check) on the borrower. A loan without a credit check is a viable alternative to traditional financing for those looking for a loan but know their credit history will not be accepted.

A credit check allows a business to access a potential borrower’s credit report from one of the three major credit bureaus – Experian, Equifax, and TransUnion. These inquiries are especially important if the borrower is asking for a large amount of money, such as a home loan or car loan. These reports will show the borrower’s finances and ability to pay.

If a borrower’s credit history shows an abundance of late or missed payments, too many recently opened accounts, or a high credit utilization rate (for example, maximum credit cards), the lender can deny the loan application. These red flags are also negatively impacting the FICO credit rating, and borrowers below 600 are under credit. Credit checks exist to prevent the consumer from borrowing more than he can repay and to protect the lender from financial loss.

You may have gone bankrupt or dealt with collection agencies in the past, causing your credit rating to deteriorate, but you’ve been in charge of your finances ever since. Or you are a recent college graduate who has never applied for a credit card and therefore has no credit history. A loan without a credit check might be right for you.

As the name suggests, a no credit check loan involves no credit check. In financial terms, these are known as subprime loans. Lenders provide these loans to borrowers with a higher risk of default than more favorable blue chip borrowers. However, as with any financial decision, there are pros and cons to using loans without a credit check.

Pros and Cons of a No Credit Check Loan

Since a car purchase costs a lot less than a house (and causes a lot less loss), more lenders are willing to offer auto loans without a credit check. And because reputable lenders who offer subprime auto finance tend to have more options in terms of financial support, they can be more flexible regarding loan term, repayment terms, and interest rates.

The overall process of applying for a car loan without a credit check is straightforward, can be done online, and with same day approvals. Borrowers can also choose not to make a down payment. However, instead of a credit check, lenders may have other requirements before approving the loan, such as the borrower’s permanent address and proof of income.

Depending on your financial situation, however, the disadvantages of an auto loan without a credit check may outweigh the advantages of owning a car. Since subprime borrowers are considered high risk debtors, lenders will recoup potential losses through high interest rates, which would make a car loan without a credit check the most expensive way to pay off. buy a vehicle.

In August, Experian reported that blue chip borrowers with FICO scores of 720 or higher received an average annual rate (APR) of 3.65% for new car loans and 4.29% for new car loans. opportunity. Conversely, large subprime borrowers (a FICO score of 579 or less) averaged 14.39% and 20.45% APR on new and used car loans, respectively. Again, these are averages, and rates can go up to 36% (which some states have capped).

Your vehicle selection may also be limited to a specific price range depending on your income. After all, lenders would rather have you pay off your loan than default. And if you miss payments or give up the loan altogether, the vehicle can be repossessed and resold.

Also, since no credit check is needed to get the loan, no credit report from the lender is needed either. So even if you make payments on time, you are not improving your credit score or increasing your credit history. Ironically, while auto loans without a credit check will not increase your credit rating, non-payment will undoubtedly hurt it. Lenders can send your remaining debt to a collection agency, which will report delinquent borrowers to the credit bureaus.

Another thing to remember is that unfortunately there are some dishonest companies out there, so consider those that charge pre-approval fees or post-dated checks for prepayments as lenders to avoid. Legitimate financiers will not ask you for money up front except in the form of a down payment on your loan. Always check with the Better Business Bureau and confirm the lender’s contact details, especially for online funding sources.

Other loan options for zero or bad credit car buyers

If a car loan without a credit check sounds like a bad idea, there are other auto financing options such as credit unions, personal loans, and someone with good credit co-signing your loan. Credit unions are less restrictive on loan terms and will offer lower rates (for example, federal credit unions are capped at 18%).

With a low credit score, qualifying for a personal loan from a traditional bank is not impossible, but the applications can be complicated and the restrictions will be many. Fortunately, there is no dearth of online lenders offering loans to people with bad credit and will do so without doing a credit check. But keep in mind that the loan amounts might not cover the cost of the vehicle, as some limit personal loans to a maximum of $ 5,000.

Finding a co-signer could make up for any bad credit history you have, as lenders will be more confident that someone will make the payments. Don’t take advantage of the co-signer and be sure to make the payments yourself. Otherwise, a personal relationship may deteriorate.

Other options for obtaining financing without a credit check, while less than ideal, are payday loans and guarantees, or car title loans. Both are short-term solutions (think 30 days), and while neither requires a credit check, they come at a steep cost. Payday loans carry over 400% APRs while secured loans, usually for the amount of the vehicle’s value, also have high interest charges and allow the lender to repossess your car.

Having zero credit or bad credit doesn’t have to be a burden that keeps you from buying a vehicle. Just know that you have options and understand which are better or worse for your specific situation. And if you are just starting out, even a small loan that gets paid on time all the time will help you build a positive credit history so you never have to consider a car loan without a credit check.