A high credit score makes it easier to qualify for loans, and you can get access to lower interest rates and higher loan amounts as a result. Some people take time to build their credit scores before applying for a large loan like a mortgage or auto loan, But most people build credit history through credit card transactions and loan payments. Although a great credit score is optimal, it’s better to have no credit than low credit. Can you get loans even if you have no credit history? Short answer: yes, and we’ll discuss some paths you can take to get a personal loan, even if you have no credit.
What Are Personal Loans?
Personal loans provide you with financing to cover any expense. You can use these funds for your business, a vacation, or any other reason. Many borrowers use personal loans to pay off credit card debt since these loans have lower rates. Borrowers must make monthly repayments until they pay off the entire loan. The lender and borrower will agree on a loan length before the money is exchanged hands.
You can reduce your monthly payments with a lengthier loan term. However, you will pay more interest in the long term. You can pay less interest with a shorter loan term, but you’ll have higher monthly repayments.
What Are Some Common Requirements For Personal Loans?
Financial institutions incur risk with each loan they originate. The borrower can fall behind on payments or default on the loan. Lenders want to feel confident in your ability to repay the loan. Therefore, lenders will review the following information before giving you capital.
Credit Score and History
A credit score reflects the borrower’s ability to manage debt. A high credit score indicates the borrower is likely to repay the debt on time, while a low credit score indicates the opposite. Lenders will need more information to assess borrowers with no credit. People with no credit aren’t necessarily bad at paying off debt. Some of these consumers were never given a chance to manage and repay debt. Paying debts on time is the best way to improve your credit history and maintain a high score.
Income
Most lenders will look at your income over the past 1-2 years. Financial institutions want to see reliable income instead of inconsistency. Borrowers with inconsistent income are at higher risk since a gap can force them to fall behind on loan payments.
Debt-to-income Ratio
The debt-to-income ratio compares your monthly income and debt payments. For example, if you pay $2,000 per month in debt and make $8,000 per month, your debt-to-income ratio is 25%. Lenders have maximum ratios, and if your ratio is out of bounds, you won’t get a loan. Most lenders will give you a personal loan if your debt-to-income ratio is below 40%.
Collateral
Most personal loans are unsecured and do not require collateral. However, some lenders may ask you to put some collateral on the loan to minimize their risk. If a borrower defaults, the lender claims ownership of the collateral. This loan structure allows banks to claim properties if borrowers fall behind on payments. You won’t have to worry about collateral for most personal loans. However, adding some collateral can lower your personal loan’s interest rate.
Fees and Other Costs
Lenders charge several fees for loan applicants. You will have to pay a small application fee to apply for a loan. If your application gets approved, you will owe an origination fee. This fee is the cost of producing the loan. Loans have some additional fees you might have to pay depending on your situation:
- Prepayment penalty: If you pay the loan early, you’ll owe an extra fee.
- Late payment fee: Lenders use this penalty to discourage people from falling behind on loan payments.
- Returned check fee: If the check you send to the creditor bounces, you’ll incur a returned check fee. This event can also trigger a late payment fee.
Check the loan’s terms before accepting the money. You don’t want to get stuck with higher fees than intended.
Why Credit History Matters for Loans
Lenders incur risk with every loan they give out. If enough borrowers do not pay back their loans, a loan provider will eventually go out of business. To mitigate risk, lenders will check your credit report to determine if you can make monthly payments. While your monthly income also plays a role, a lender can immediately reject your application if you have bad credit or don’t have any credit history.
While getting a loan without going through a credit check is possible, you’ll likely end up with a higher interest rate. The rate you receive is based on the perceived risk a lender incurs, and no credit creates more uncertainty for the lender.
The Role of Credit History in Loan Approval
Your score plays a pivotal role in credit-check loans. If you qualify, this type of loan comes with lower interest rates and better terms, but you will also need a good credit score. Credit history details your history of making payments for other financial obligations. If you have made several late payments, a lender will charge a higher rate and may feel less encouraged to work with you. A good credit history will give you more opportunities, while people with bad or no credit will have fewer opportunities.
How Lenders Assess Borrowers Without Credit History
You can still get an unsecured personal loan without any credit history. Lenders will look at your income and employment to gauge if you can make on-time payments. Loan providers will also review your current debt and other components of your financial profile to determine which type of loan is right for you. To build a credit history, you may have to start with a secured loan like a credit-builder loan.
Getting First Time Personal Loans With No Credit History
Building credit puts you in a better position to get a loan, but not everyone has enough time to improve their credit scores. In addition, you may need the money to cover an emergency expense or afford a family vacation sooner. Time is of the essence, and these paths can help you access a personal loan with no credit.
Get One With Your Current Bank Or Credit Union
Banks and credit unions offer loans to people with no credit. You may have to pay a higher interest rate, but banks and credit unions offer some of the lowest rates in the industry. Getting a personal loan and paying on time will strengthen your credit history and help you secure a lower rate for your next loan.
Look For Online Lenders
Online lenders provide more flexibility. However, some of them will ignore your credit score or have more generous qualifications. You can get competitive rates from online lenders, but some charge excessive rates. If a lender doesn’t ask for much information, you should prepare for a high interest rate. Payday loans are especially notorious for high interest rates.
Get A Co-Signer
A co-signer with good credit can help you qualify for a loan. When deciding on your loan terms, lenders will assess the co-signer’s score and both of your incomes. The co-signer is legally responsible if the borrower cannot pay the loan, making it a risky proposition for the co-signer. You should explain to a potential co-signer how you will manage the debt so they feel more confident helping you.
Offer Collateral
You don’t have to offer collateral, but it demonstrates your commitment to paying the loan. Creditors will lower your interest rate and become more accommodating if you don’t have a credit history.
Borrow From Friends and Family
Some borrowers have a large enough network of family and friends to ask for money. This funding source can help you cover affordable short-term expenses instead of going through the traditional banking system. You’ll avoid loan fees and may even get a break on interest depending on who gives you money. You should establish a clear timeline for how you will repay each friend and family member.
Challenges of Getting a Personal Loan with No Credit History
While a personal loan is a good option for obtaining extra cash, you should anticipate these obstacles if you do not have a credit history.
Higher Interest Rates
Unsecured loans, in general, have higher interest rates than secured loans. The APR gets even higher if you have no credit history. Some lenders will still give you an installment loan, but the elevated annual percentage rate will result in higher monthly payments.
Limited Loan Options
Many lenders require that you have at least a fair credit score to receive a loan. Some lenders will work with you if you have a FICO score as low as 580, but most opportunities open up if you get your score into the 600s.
People with no credit will not qualify for a lender’s minimum credit score requirement. Instead, you will have to seek a first-time loan or a similar financial product that is more flexible. Payday lenders can help out and give you the cash you need, but it’s not a good idea to use these loans. These types of personal loans have excessive rates and fees.
Stricter Lending Criteria
Lenders are going to look for other requirements to ensure you can pay back the loan. You may have to report a lower debt-to-income ratio than average or end up with an unfavorable personal loan. If you have enough time, building your credit with something like a secured credit card is better. Adding points to your credit score can help you qualify for the best personal loans and save a lot of money in the process.
Alternatives to Personal Loans
Not everyone needs a personal loan for their financial situation. These are some of the viable alternatives that can give you the cash that you need.
Paycheck Advances
Consider signing up with an online bank that can offer you a small advance on your next paycheck. For example, some finance apps allow you to get instant access to your paycheck in advance within a few days before your actual payday.
Cash Advances
If you already have a credit card, you can take out a cash advance instead. These cash advances have high APRs and fees, but you may save money if you don’t have good credit.
Non-Traditional Borrowing Options
You can reach out to friends and family to borrow money if necessary. This unconventional route can save you money compared to seeking out personal loan lenders. You can also use crowdfunding to raise the cash that you need.
Government Assistance Programs
The government has many assistance programs that help people who need extra funds. You can review federal and local programs to see if you qualify.
Home Equity Loans or HELOCs
Home equity loans and home equity lines of credit let you borrow capital against your property’s equity. Home equity loans are similar to secured personal loans since your property becomes collateral.
Home equity loans and HELOCs tend to have lower interest rates than other types of financing. However, you will have to do some searching to find a lender that will offer this type of financing for people with bad credit or no credit history. It’s unlikely that this option is available for people with no credit history, as they would have had to make an all-cash home purchase. Some lenders may be willing to work with you if you have bad credit.
Home equity sharing is another option to consider if you don’t want to get deeper into debt. But you will have to buy back your equity position if you want to regain full equity in your home.
FAQs About First Time Personal Loans No Credit History
Secured personal loans and lines of credit are the easiest first time loans to get. Secured credit cards and credit builder loans are great starting points. You can technically get a payday loan or a title loan even if you don’t have any credit history, but these are some of the worst financial products available. You should exhaust all of your other options before considering any of those loans.
The size of your loan depends on your income, employment, other financial obligations, and other factors. It’s possible to get a $1,000 loan even if you have no credit. You might even get a $50,000 loan, but your mileage may vary.
