Devon Madison works as a special education elementary school teacher, her first job since graduating from Vanderbilt University last year. She has been driving her parents' 2002 Honda Civic, but she wants to cut the cord. "I want to buy a reliable used car that's not a clunker," she says.
Like many young people, Devon, 23, can't afford to write a check for a trouble-free used car, which she figures would take at least $10,000. She has some savings for a down payment, and she'll need to borrow the rest -- and that's the problem. A few months ago, she found a car and applied for a loan at her bank. She was turned down. Then she applied to another bank. No dice. Devon even talked to a credit union, but the prospects didn't seem encouraging so she didn't apply.
There's no indication that Devon is a high-risk borrower. She applied for and got a credit card when she graduated, pays her rent and other bills on time, and is starting to repay her college loans. So what's the roadblock?
"The lack of a solid credit history definitely makes it hard to get her first loan," says Gerri Detwiler, director of consumer education for Credit.com. Because rent and utility payments aren't reported to credit bureaus unless you're delinquent, a credit card can build a history if you make small purchases and pay them off like clockwork. But what if you need a loan right away?
It may pay to skip banks and head straight to the car dealer, says Claes Bell, auto expert at Bankrate.com. Dealers often set up agreements with lenders to send buyers their way in exchange for lenient loan criteria. Also, some manufacturers, such as Honda and Toyota, offer recent graduates (within two years) special loan programs for new and certified used cars through their captive finance companies.
Regardless of your credit history, the more cash you bring to the table, the more likely you are to get the keys. Devon has about $2,000 saved toward a $10,000 vehicle; for used cars, lenders like to see 20 percent down, so she's in good shape. Shortly after our interview, Devon found a 2008 Honda Civic for just under $12,000. She persuaded the dealer over the phone to lower the price to $11,000. She was preapproved for financing on the dealer's website, and she got a rate of 5.2 percent. The payments for six years are a manageable $200 a month and will help build her credit history.