What is a no credit check car loan?

Typically, when applying for a loan, the potential lender will perform a credit check (sometimes called a credit inquiry) on the borrower. A loan without a credit check is a viable alternative to traditional financing for those who are looking for a loan but know that their credit history will not pass.

A credit check allows a business to access a potential borrower’s credit report from one of three major credit bureaus – Experian, Equifax and TransUnion. These inquiries are especially important if the borrower is requesting a large sum of money, such as for 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 high credit utilization (e.g., credit card maxing), the lender may deny the loan request. These red flags also negatively affect the FICO credit score, and borrowers rated below 600 miss out on creditworthiness. Credit checks exist to prevent the consumer from borrowing more than they can repay and to protect the lender against financial loss.

Maybe you went bankrupt or dealt with collection agencies in the past which would have hurt your credit rating, 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 could be right for you.

As the name suggests, a no credit check loan involves no credit check. In financial terms, we talk about subprime loans. Lenders provide these loans to borrowers with a higher risk of default than more favorable prime borrowers. However, as with any financial decision, there are pros and cons to using no credit check loans.

Advantages and disadvantages of a loan without credit check

Since an automobile purchase costs much less than a house (and incurs considerably less loss), more and more lenders are willing to offer auto loans without a credit check. And because reputable lenders who offer subprime auto financing tend to have more options when it comes to financial support, they can be more flexible about loan terms, repayment terms, and interest rates. .

The overall no credit check auto loan application process is simple, can be done online and with same day approvals. Borrowers can also choose not to make any 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 a no credit check auto loan 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 no credit check car loan the most expensive way to buy a vehicle.

In August, Experian reported that super-prime 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 used cars. . Conversely, deep subprime borrowers (a FICO score of 579 or less) quote an average of 14.39% and 20.45% APR on new and used auto loans, respectively. Again, these are averages and rates can go as high as 36% (which some states have capped).

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

Moreover, since no credit check is required to obtain the loan, no credit report from the lender is required either. So even if you make payments on time, you are not improving your credit score or increasing your credit history. Ironically, while no credit check car loan will boost 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 dishonest companies out there, so consider those who ask for pre-approval fees or post-dated checks for prepayments as lenders to avoid. Legitimate financiers will not ask 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 car buyers with zero or bad credit

If a car loan without a credit check sounds like a bad idea, there are other car financing options such as credit unions, personal loans, and having someone with good credit co-sign 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, it’s not impossible to qualify for a personal loan from a traditional bank, but applications can be complicated and there will be many restrictions. Fortunately, there is no shortage of online lenders offering loans to people with bad credit and will do so without performing a credit check. But keep in mind that loan amounts may not cover the cost of the vehicle, as some limit personal loans to a maximum of $5,000.

Finding a co-signer could offset the 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 is likely to deteriorate.

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

Having zero 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’re just starting out, even a small loan that’s paid on time all the time will help you build a positive credit history so you never need to consider a car loan without a credit check.

About Galen A. Williams

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