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I’ve graduated college and got myself a pretty solid engineering job. And think it’s time for a new car.

I’m looking at some of the nicer cars in the $100k range. The problem is I’ve never had a credit card or financed a car. I’ve always used a debit car or paid cash. I’ve had a hard time getting a bank to approve a loan even with $30k as a down payment. I’m relatively new to the world of financing and credit. I don’t really want to buy a cheaper car, because I don’t want to buy a depreciating asset that I don’t really want.

I recently had the thought of taking out a car loan, but instead of buying a car, putting it into a CD to minimize the interest, so effectively paying a little to get a credit history.

Is this legal?

Or would I be better served saving my money to put an even bigger down payment?

  • Hi @Ross - welcome to SE. The legal aspect of it may be better directed at law.stackexchange.com – perennial_noob May 24 at 22:26
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    What have you actually done to shop the loan? If you're looking at an M3 or something along those lines have you actually gone to a BMW dealer to talk with them? The dealers can pull strings with the captive auto lenders to move cars. It goes without saying that this is a bad idea to lease a $100k car if you've never had credit, but I'd be surprised if you actually couldn't do it. – quid May 25 at 1:40
  • How long have you had that lucrative job? (If you've had multiple, then both how long you've been in that pay grade, and how long you've been at this particular job will be of interest to a lender). Someone who's lived debt-free for 5 years since college and someone 5 weeks out of college and still in their probationary period will not be treated the same, even if the fresh-out managed to land the same fat paycheck. – Ben Voigt May 25 at 2:51
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    And your $100k car does not depreciate?… – glglgl May 25 at 20:48
  • You mention that you've had a hard time getting a bank to approve your loan. Have you asked the banks why that is? Or have you asked them for advice on what you could do to achieve your goals? It may not be your credit history that's causing them to deny the loan. – dwizum Jun 5 at 15:40
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If you (a) have in the region of $30k savings to use for a down payment and (b) want to get an installment loan to build your credit, have a look at a "savings-secured" or "share-secured" loan offered by most credit unions. $2k-$5k is enough. The big advantage is that because it is collateralized, you get a low rate like a car loan -- but without being forced into a purchase you don't want.

I actually opened one this morning, because I anticipate buying my first house in the next couple years and bought my current car with cash, so I have no open car loan and no loan in the last 9 years that would show up on my credit report in the timeframe I need. Furthermore, every score report I get from my bank says it's being dragged down by lack of installment loan information.

The one I got has an interest rate of 2.05% APY. It should cost me less than a hundred dollars in interest between now and when I apply for a mortgage, and any effect whatsoever on my mortgage rate will make up for that many times over. And with no prepayment penalty, as soon as I have a mortgage locked in and approved, I can pay off the share-secured loan and stop paying interest altogether, because appearing next to a mortgage, a small installment loan will have little or no effect.

A similar product could work well for you to build credit and unlock more favorable car loans as well as credit cards with better rewards or lower rates.

I had emailed several credit unions with questions, here is the response I got from the one I ended up choosing:

Your questions regarding Share Loans are addressed below:

  1. The loan term can be up to 142 months, as long as the monthly payment does not fall below $25. The interest rate is 2% above the current dividend rate. Currently the dividend rate on the Regular Share savings is 0.05%. The minimum loan amount is $250.
  2. No credit report is pulled for Share Loans.
  3. The loan is reported to all three major credit bureaus.
  4. There are no fees to apply.
  5. The funds are placed on hold at loan inception and are released incrementally each time a payment is made on the loan.
  6. The funds in your Regular Share account are used as collateral. Funds must have been on deposit for 30 days or more before loan will be approved.
  7. There is no prepayment penalty.
  8. Payments in excess of the minimum due will apply towards your next due date.

You should be able to find similarly favorable terms.

  • Thank you so much, this looks like a very promising route to take! – Ross Sullivan May 25 at 4:19
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To answer the question, a bank is not going to give you a "car loan" with no car. The loan must have a car securing it as collateral (if you don't pay the loan, they take the car). With no collateral, you're looking at a personal loan, which is unsecured and carries a much larger interest rate since it's a greater risk to the bank.

The main problem with buying new cars is they depreciate like crazy the first two or three years. So in a year or two you'll still have a $60k car loan on a car that's only worth $50k. That's the main reason you can't get such a big loan right out of school. The insurance cost will also be high, so take that into account.

Financially, it only makes sense to buy a brand-new car when 1) you have the cash to buy it and 2) you can afford to lose the car. (Yes, insurance will cover some of the recovery, but the cost of the insurance will be high as I mentioned)

How about buying a really nice $30k car with cash, putting what your car payment would have been in a relatively safe investment (earning 5-6% per year instead of spending 505% per year), and buying the $100k car once you have the cash? You'll have the car debt-free faster than it would take you to pay off a $70k loan on a rapidly depreciating asset.

I also assume (hope) that you have no student loan debt to take care of first.

  • Thanks for the advise, I agree that a new car for that much doesn’t make much sense from a depreciation stand point. The cars i have been looking have are in the 2010-2012 range(where they are mostly done with the intial depreciation wave). Like I said I’m not sure I would want to spend 30k on car I don’t really want. I would probably keep my current car and continue saving. – Ross Sullivan May 24 at 23:02
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    @RossSullivan I like that plan even better :) – D Stanley May 24 at 23:05
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Here are some thoughts right away.

Putting aside the eventual legality, you may not be able to get an auto loan to use it personally because usually the bank works with you through the buying process and then registering the vehicle with the bank and retaining the bank as the entity that owns the car with the DMV. So you won't get the funds at hand.

However, I'll take your question and apply it to a general/personal loan and that is something you could do. Of course personal loans usually come in more expensive than auto loans and so your 'payment to build a credit history' is higher despite the CD helping ease the pain.

  1. Some easier ways to build credit (and cheaper) would be to actually start using a/multiple credit cards.
  2. Or if you don't like the idea of credit cards then you could still get a secured credit card (effectively a debit card). Here you would not gain any interest as you would from a Cd but you are also not paying any interest like in your solution.
  3. If you are reasonably confident of your earning potential and your payment potential, you could save for higher down payment.

Again, unless you are in principle opposed to credit cards, you could get one and hope to score a high limit (enough to cover the remaining part of your payment through a card). Or after some usage of a couple of basic credit cards you could apply for a credit card that may have a 0% APR for 15-18 months and spread out your remaining balance on such a card.

  • Thanks, I forgot to mention that I just got my first credit card last month. I’ve been using it here and there. Slowly building up my credit. – Ross Sullivan May 24 at 22:44
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    @RossSullivan use the CC more. And make sure there's a balance when they report it to the credit bureaus. Don't let the balance be above 10% of the card's credit limit at that time, though. – RonJohn May 24 at 23:20
  • Secured personal loans don't have to be more expensive than auto loans. – Ben Voigt May 25 at 3:17
  • @RossSullivan I deliberately chose not to focus on challenging your decision to buy a car of whatever price you wanted to because there are enough Q&A available that discussed about a car being a depreciating asset and all that. I mainly wanted to address the point that you can't get an auto loan with the cash at hand. – perennial_noob May 25 at 5:42
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First off, there is AFAIK no such thing as a purely auto credit history, there is just a credit history. The exact methods by which credit scores are calculated are proprietary to the different credit reporting agencies, but in general are based on multiple factors like the length of open accounts & payment history. (Searching for "credit history factors" returns around 430 million hits...)

The solution to having a good credit score involves discipline and patience. Apply for a couple of credit cards, put your spending on them instead of a debit card*, pay the balance in full every month, and wait. Eventually you'll have a good credit score.

Just as a practical example, I've only ever had one car loan, and that was maybe 35 years ago. Other than that, the only loans I've had were mortgages and a couple of long paid off student loans, yet last I looked my credit score was well over 800.

(I'll skip the long rant about the stupidity of taking out a loan for a $100K car, or FTM spending $100K on a car, period :-))

*And pick cards that give you cash back, or other things like frequent flyer miles if they're useful to you.

  • To be fair, there is an inherent (but small) difference in how scores are calculated for revolving lines (like a credit card) versus installment loans (like a car loan or mortgage). A person with good history consisting of several credit cards will typically have a slightly lower score than a person with good history on several credit cards and an installment loan, i.e. a car loan. – dwizum Jun 5 at 15:38
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Sign up for credit cards to build your credit history.

You can't get a car loan without the actual car because they use the car as collateral. Don't get an expensive car though.

You should save up for down payment to buy real estate, an appreciating and cash flowing asset. If you do it right, you can make A LOT more money investing in real estate than from an engineering job. But the engineering job is a good foundation for saving money and having a stable income for obtaining mortgages.

To answer your question explicitly - you can lease a car which show up on your credit history, but you won't technically "own" the car.

Good luck and have fun!

  • But for most of us, an engineering job is a lot more fun and a lot less work than being an active real estate investor. IMHO, put the money in mutual funds - index funds or even one that invests in real estate - then sit back and enjoy life :-) – jamesqf May 27 at 17:29

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