Getting a personal loan with no credit history and no cosigner can be difficult, but there are always options available. While you may not get approved for a large loan with a traditional bank, you can find a bad credit loan or no credit loan through other types of lenders. If you’re willing to put the time and effort into researching potential lenders, you’ll find a loan that provides you with the funds you need while also helping you build up your credit score.
How Having No Credit Affects Your Ability to Borrow
Unfortunately, having no credit history looks very similar to having bad credit history. If you’ve never borrowed before, you may not be eligible for many types of loans.
Here are the most important factors in determining your credit score:
- Payment history
- Credit utilization
- Length of credit history
- Variety of credit accounts
- New credit accounts
When you don’t have any credit accounts, it means you’ve never missed a payment, but it also means that you’ve never made an on-time payment. You also don’t have any available credit, which doesn’t look good to credit bureaus. The amount of time you’ve had credit directly influences your score, too, so it’s difficult or impossible to have a good credit score with no or minimal credit history.
Credit scores range from 300 to 850. Most people have a credit score between 580 and 800, but if you’ve never borrowed before, you may not have a credit score at all. You need six months of credit history to have an established credit score, and even at this point, the score will be low because the credit history is so minimal.
If your credit score is nonexistent, lenders won’t know whether or not you’re a trustworthy borrower. You don’t have any prior loans or lines of credit to prove that you’ll pay on time. Many lenders set credit score minimums for borrowers because it’s a big risk to loan money to someone who doesn’t have a proven payment history.
Some lenders will offer loans to borrowers with bad or no credit, but the interest rate will be much higher. You may end up spending hundreds or thousands more on interest than someone with a higher credit score, which makes the loan more difficult to repay and increases your chances of missing a payment.
Having no credit history reduces your options for borrowing, but getting a personal loan isn’t impossible. Fortunately, there are several ways to find a loan if you have bad or no credit.
Secured Loan
Offering collateral is one of the best ways to get a loan if you have no credit history. This gives the banks something they can claim if you default on the loan, so it reduces their risk.
A secured personal loan is backed by collateral. Popular sources of collateral include real estate, vehicles, bank accounts, and stocks. In most cases, the collateral must be equal to or greater than the amount of the loan. If you’re able to offer collateral, you can be eligible for a larger loan amount at a lower interest rate. Most major banks offer secured personal loans, so this can open up a wide variety of opportunities.
However, if you default, the lender will take possession of the asset you pledged to back the loan, so there’s more risk involved for you. Consider the likelihood of you missing payments to decide whether or not it’s worth offering collateral.
Home Equity Loan
A home equity loan is a type of secured loan that uses your home as collateral. You can typically borrow the value of your home minus the balance left on your mortgage.
If you don’t have a credit history, it’s very unlikely that you have a mortgage or a paid-off home. However, if you do find yourself in this situation, a home equity loan may be your best choice. You may be able to get a larger sum with a home equity loan than with another type of loan because your home is a very secure form of collateral. Like with all secured loans, though, consider the risk of losing the asset if you default on payments.
Credit Builder Loan
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Credit builder loans are intended to help people establish or increase their credit score, so they can be a great option if you have no credit history. Many credit unions and smaller banks offer these loans.
When you take out a credit builder loan, the amount you’re approved for is held in an account by the lender. These loans are usually around $1,000 and require monthly payments. Once you’ve paid off the loan, the lender gives you the amount you paid in full.
A credit builder loan doesn’t give you immediate access to cash, so it’s not a possibility if you need funds right away. However, if you anticipate needing a larger loan at some point in the next couple years, taking out a credit builder loan right now can increase your credit score for future borrowing opportunities.
Online Lenders
Online lenders may have more flexible terms and better interest rates than traditional banks if you have bad or no credit. Several online lenders specialize in bad credit loans or loans for borrowers with no credit history. Not only do these loans provide you with cash flow, but they also help you build or repair your credit.
Applying for a loan with an online lender can be faster and easier than applying with a traditional lender. You may be able to get the funds within just a few days of applying. Most online lenders will do a soft credit check to determine your approval odds without affecting your credit score, which will help you decide whether or not you should submit an application.
Peer-to-peer lending is another option that the internet has made widely available. This involves borrowing directly from an individual or a group of people instead of borrowing from an institution. There are several peer-to-peer lending websites that connect lenders and borrowers. Peer-to-peer lenders tend to be more flexible and accepting of low credit scores, especially if you have a steady income or another way to prove your creditworthiness.
Beware of scams while looking for online loans. While there are plenty of reputable, trustworthy online lenders, there are also some that prey on desperate or vulnerable borrowers. Your lender should not request any fees upfront, and they should be clear about the interest rate and the length of the loan. Even a lender offering a bad credit loan should check your credit report before approving your application.
Payday Alternative Loan
A payday alternative loan, or PAL, is a small and short-term loan offered by a federal credit union. While traditional payday loans have massive interest rates, PALs offer more reasonable terms.
PALs have to follow regulations set by the National Credit Union Administration. The loan value can range from $200 to $1,000, the length of the loan can range from one to six months, and the APR cannot exceed 28 percent. This is still a very high interest rate, so it’s critical that you pay the loan off quickly. However, it is a much safer alternative to a predatory payday loan if you need access to funds quickly.
Many credit unions offer PALs to borrowers with poor credit or no credit if they have proof of income. Because the loan is so short-term, lenders are more interested in your ability to immediately repay the balance than they are in your potential to make consistent payments over a long period of time. PALs are usually reported to credit bureaus, too, so they can help you build up your credit score.
Loan From Family or Friends
If you’re unable to get a loan from a financial institution, consider borrowing from a close friend or family member. Someone you know is less likely to worry about your credit history than a bank or credit union if they trust that you’ll pay them back.
Mixing your finances with your personal life can be risky, so borrowing from friends or family should be your last resort. If there’s any chance of you being unable to pay back the loan, don’t ask someone you know if you can borrow money. This can put a serious strain on your relationship. If you do borrow from a friend or family member, create a written agreement with a plan for paying them back.
Conclusion
Having no credit history does limit your choices for borrowing, but it’s not impossible to find personal loans with poor or no credit. Whether you borrow through a traditional bank, an online lender, or someone you know, you can get access to funds if you’re patient and thorough in your search. Then, after establishing your credit, borrowing in the future will become much easier.
Have you been able to get a loan with no credit history? Let us know how you did it.
