What Are No Credit Check Car Loans?

Typically, when applying for a loan, the prospective lender will conduct a credit check (sometimes called a credit inquiry) on the borrower. A no credit check loan is a viable alternative to traditional financing for those seeking a loan but who know their credit history won’t pass muster. 

No Credit Check Car Loan

A credit check allows a business to obtain access to a prospective borrower’s credit report from any of the three major credit bureaus — Experian, Equifax, and TransUnion. These inquiries are particularly important if the borrower requests a significant amount of money, like for a home mortgage or car loan. These reports will show the borrower’s finances and ability to pay. 

If a borrower’s credit history displays an abundance of late or missed payments, too many recently opened accounts, or a high credit utilization rate (e.g., maxing out credit cards), the lender can deny the loan application. These red flags negatively affect one’s FICO credit score as well, and borrowers rated below 600 are lacking in terms of creditworthiness. Credit checks exist to protect the consumer from borrowing more than they can repay and protect the lender from financial loss.

Perhaps you’ve experienced bankruptcy or dealt with collection agencies in the past, which would lead to a damaged credit rating, but have been responsible with your finances since. Or you’re a recent college graduate who’s never applied for a credit card and, therefore, have no credit history. A no credit check loan might be right for you. 

Just as the name suggests, a no credit check loan involves no credit checks. In financial-speak, these are known as subprime loans. Lenders give these loans to borrowers with a higher risk of defaulting than more favorable prime borrowers. Nevertheless, as with any financial decision, there are pros and cons to using no credit check loans.

Pros and Cons of a No Credit Check Loan

Because an automobile purchase costs significantly less than a home (and entails considerably less in terms of losses), more lenders are willing to offer no credit check car loans. And because reputable lenders that offer subprime auto financing tend to have more options in terms of financial backing, they can be more flexible concerning loan length, repayment terms, and interest rates.

The overall application process for a no credit check car loan is simple, can be done online, and with same-day approvals. Borrowers can choose to make no down payment as well. However, in place of a credit check, lenders may have other requirements before approving the loan, such as a borrower’s permanent address and proof of income.

Depending on your financial situation, however, the negatives of a no credit check auto loan may outweigh the positives of car ownership. Because subprime borrowers are considered high-risk debtors, lenders will recoup potential losses through high interest rates, which would make a no credit check auto loan the most expensive way to purchase a vehicle. 

As of August, Experian reported super-prime borrowers with FICO scores of 720 or higher to receive an average annual percentage rate (APR) of 3.65% for new car loans and 4.29% for used cars. Conversely, deep subprime borrowers (a 579 FICO score or less) average quotes of 14.39% and 20.45% APR on new and used car loans, respectively. Again, these are averages, and rates can go higher to as much as 36% (which some states have capped).

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

Additionally, because no credit check is needed to obtain the loan, no credit bureau reporting by the lender is necessary, either. So, even if you make on-time payments, you’re not improving your credit score or growing your credit history. Ironically, even though no credit check car loans won’t 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 credit bureaus. 

Another thing to remember is that, unfortunately, there are dishonest businesses out there, so consider those asking for any sort of pre-approval fee or post-dated checks for advance payments as lenders to avoid. Legitimate financiers will not ask for money up front except in the form of a down payment toward your loan. Always double-check with the Better Business Bureau and confirm the lender’s contact information, especially for online financing sources. 

Other Loan Options for Zero or Bad Credit Car Buyers

If a no credit check car loan sounds like a bad idea, there are alternative auto 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 (e.g., 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 applications can be complicated, and restrictions will be plenty. Luckily, there is no shortage of online lenders offering loans to people with bad credit and will do so without running a credit check. But keep in mind that the loan amounts might not cover the vehicle’s cost as some limit personal loans to no more than $5,000. 

Finding a co-signer could offset whatever poor credit history you have because lenders will be more confident that somebody will make the payments. Just don’t take advantage of the co-signer, and be sure to make the payments yourself. Otherwise, a personal relationship will likely sour.

Other options to obtain 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 do come at a steep cost. Payday loans carry APRs upwards of 400% while collateral loans, usually in the amount of vehicle’s value, also involve high-interest fees and allow the lender to repossess your car.

Having zero or bad credit doesn’t have to be a burden that prevents you from purchasing 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 is paid on time all the time will help you build a positive credit history so that you never need to consider a no credit check car loan.