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I've been considering buying a car recently, but I know that, as I am young, I don't currently have a credit score, as I really haven't needed credit up until now.

So, would it be better to take a loan out on this car/lease the car/just pay in cash, given that eventually I might want to buy a house (which is currently something that I couldn't pay for in cash).

EDIT: Note that this is different from other questions that have been mentioned due to the fact that I currently don't have a credit score at all, and due to the current financial markets, it may now be possible to make more by investing the money than the payments on the potential loan.

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    Possible duplicate of Taking a car loan vs cash and effect on credit score – BobbyScon Dec 30 '16 at 21:06
  • @BobbyScon, Edited to explain why those answers are not particularly relevant. – Stack Tracer Dec 30 '16 at 21:24
  • Don't let the credit-rating tail wag the credit dog... – keshlam Dec 30 '16 at 21:52
  • Dangit @keshlam, you got that in before I did. – zeta-band Dec 30 '16 at 21:58
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    Generally, trying to optimize credit rating is somewhere between not worth worrying about and scare tactics to sell services claimed to help. If you simply use credit wisely your credit rating should be good enough for most practical purposes, unless there is a specific problem like past abuse or inadequate income to justify the purchase. – keshlam Dec 31 '16 at 4:49
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It's rarely advisable to pay interest for something you can afford with cash. Just because you have no credit or loan history doesn't mean you aren't credit worthy. When applying for loans or credit, the lending institutions look at your credit report, not just your credit score. There are lots of things that show up on the reports they receive including (but not limited to):

  • Rent
  • Utility payments
  • Cell phone payments
  • Hospital bills

Right now, so many people are focused on their credit score, they're taking on unnecessary debt and potentially losing money in the long run. Yes, having a higher credit score will ultimately be beneficial, but your score will start growing naturally as you live your life. Unless of course you can and do pay for everything with cash. The concept of monitoring your score and striving to get it as high as possible is being shoved down our throats by advertisers at the moment. Don't fall for it.

Rather than taking out a loan, which will cost you money in interest and actually show up as a closed account once it's paid off, you might be better served by applying for a credit card and using it sparingly just to start getting that credit history together. (Add usual "don't spend more than you can pay back" mantra here). Get a card with no annual fee and maybe some cash back options, and use it as the auto-payment for a utility if possible. You build credit history, increase your score, and it doesn't cost you any more than you'd be paying anyways.

With regards to the investment question: With little to no credit history, you're not going to be approved for a loan with a low enough interest rate anyways. Think double digits. With a co-signer, you'll get a better rate, but then you need a co-signer. I don't know the exact math, but in today's market I'd say you'd need a loan interest rate of 2% or lower for investing to be worth thinking about.

I believe this answer helps clarify the loan to invest math: https://money.stackexchange.com/a/26193/30798

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  • So, if I don't have anything about Rent/Utility/Cell Phone/Hospital being reported to credit agencies, I really have nothing to go on right now in terms of credit report. – Stack Tracer Dec 30 '16 at 22:23
  • Also, what about the potential to make more on investments than it costs me on interest? – Stack Tracer Dec 30 '16 at 22:25
  • @StackTracer - The likelihood of you getting a car loan for a rate low enough to offset potential investment earnings with your credit history will be very slim. The rate of return on your investments would have to be higher than average and that's also not likely unless you're a very savvy investor. As others have mentioned, if paying in cash depletes your emergency fund (although you apparently have no bills to pay at all, so that fund doesn't need much...) then you may want a small loan. A credit card would likely serve your needs much better in your scenario. – BobbyScon Dec 30 '16 at 22:28
  • Well, @BobbyScon, I'm not without bills, but things like University Tuition/Meal Plans/Dorms didn't get mentioned as contributing to credit. I imagine that they wouldn't, given that there's no real credit going on there. – Stack Tracer Dec 30 '16 at 22:35
  • @StackTracer - If your name is on a bill (student loan?), it will be available for banks to report on as far as on-time payments vs late payment risk assessment. As I said: "including (but not limited to)". There are many other factors on credit reports and in the details banks can see. If paying for a car in cash means that you run the risk of not having the cash to pay tuition, then apply for a loan. If you can pay for the car in cash and have low to no risk of not being able to cover your bills, then pay in cash. – BobbyScon Dec 30 '16 at 22:40
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Don't let the tail of credit score wag the dog of prudent financial planning. If you have a sufficient emergency fund in addition to the car cost, then buying the car for cash is to my mind a better plan. But if the car purchase would deplete your emergency fund, then I'd go for the loan. Cash in hand gives you optionality that can be very valuable when things go wrong. And credit will be withdrawn at exactly the most painful moment.

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If you have no credit score it is generally far easier and more affordable to establish credit the cheapest way possible, which is usually in the form of a small credit card (student card if you are a student, low credit line unsecured, or even secured if you need). Your local bank/credit union will usually be keen to offer you something to start out, but you can also apply online to some of the major credit card vendors. As always, look out for annual fees, etc.

In general, trying to get a larger loan to establish credit will cost you a lot as you will not qualify for any legitimate 0% or ultra-low APR car loans - those are reserved for people with established and generally pretty good credit. I expect you'll find a car loan that will have a lower APR than you could get investing your money otherwise - especially if you do not have established excellent credit - to simply be a phantom (you won't find it), and even if you could it is more risky than it is worth.

Furthermore, if establishing credit is important to you (such as for buying a house down the road), you can build an excellent credit score without ever having a car loan. So you don't have to buy a car on borrowed money just to hope to get approved for a house some day - it's just not a requirement.

Finally, I urge you to make a decision on the best car for you in your situation, ignoring the credit score - especially if you are more than 3-5+ years away from buying a house. Everything else about buying a car is more important - the actual cost of the car, year, mileage, suitability for your needs, gas mileage, maintenance and insurance costs, etc.

Then, at the very end of your decision making process, ensure that buying the car would not put you dangerously low on savings by squeezing your emergency fund. Decide if you really need a loan or as expensive of a car, considering the costs over the expected life of you owning the car (or at least the next 2-5 years). Never get trapped into just thinking about monthly payments, which hide the true cost of loans and buying beyond what you can afford to purchase today.

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