Your credit file is another way of saying credit report, and it's made up of all kinds of information that contribute to your credit score. If there's not much information to go on and you have a thin credit file as a new or used car buyer, you may have a low or mediocre credit score which can affect your chance of getting an auto loan.
What does it mean to have a thin credit file? When you have a thin credit file, it means there's not a whole lot of information in your credit report. This is typically the case if you're new to credit, but also comes from not using credit for long periods of time, or just using it sparsely. Thin credit files typically mean a credit score that starts in the low- to mid-range on the 300 to 850 FICO credit scoring model.
How does thin credit impact a car loan? By this token, many people with thin credit files are considered bad credit borrowers, which can lead you to fewer options when it comes to financing a vehicle. However, if you're working with the right lender, namely a subprime lender, they can tell the difference between situational bad credit such as your thin file, and the habitual bad credit which comes from mismanagement.
The right lender may be willing to work with a bad credit borrower, but it still requires you to meet a few more stipulations to qualify for an auto loan. These requirements help a lend look beyond your credit score to see if you have the ability to take on a car loan since they can't judge from your credit file (or lack thereof).
In addition to meeting lender requirements, borrowers with thin credit files often need to provide a down payment, which could be more than the standard 10% or $1,000 minimum generally required for bad credit car loans. Another stipulation that's common in this case is a cosigner.
A cosigner is someone who signs the loan with you and agrees to make payments if you can't. Whoever you ask to cosign for you should have a good credit score. Cosigners are able to help because lenders look to them and their credit score to help get you approved, you're basically borrowing their good credit.
If you can't get a loan through a traditional or subprime lender, even with a cosigner, you may still be able to shop at a buy here pay here (BHPH) lot with a thin credit file. BHPH dealers don't always check your credit and instead rely on your income information and a down payment to qualify you for lending.
Car loans help build credit. If you have a thin credit file you're not out of the running for an auto loan, but it may take a little more work to get qualified. If you want to improve your credit, bulking up your file with a car loan is a good way to go. A car loan adds to all areas of your credit report as a long-term installment loan, and gives you plenty of time to make on-time payments – one of the best ways to improve your credit!