7 Tips For Getting A Loan When You Have No Credit

Summary: Even if you have no credit history, you still have options for getting a loan.

Getting a loan with no credit

By Ben Luthi

If you need cash to finance a large purchase or cover an emergency or everyday living expenses, it can be tough to get approved for a loan if you have no credit.

That doesn’t mean there aren’t any options, however. It’s simply a matter of knowing where to look. Here are the top options:

There are plenty of lenders that specialize in working with borrowers with no credit history, and you might even have a chance of getting approved with a traditional lender. Here’s what you need to know and how to get the cash you need.

Lenders and credit checks

In most cases, you can expect a lender to run a credit check when you apply for a loan. While some lenders don’t do credit checks at all, it’s in your best interest to avoid that type of lender. Most of these are payday lenders, charging you interest rates that can exceed 400%.

Even some personal loan companies don’t run a credit check, though. In this case it means the lender probably isn’t doing its due diligence to determine whether you’re a risky borrower. To make up for that potential risk, these lenders often charge exorbitant interest rates — often in the triple digits.

As a result, it’s usually in your best interest to work with a financial institution that will check your credit history, even if you don’t have one.

No credit is not bad credit

Also, it’s important to keep in mind that having no credit history is better than having bad credit. Instead of showing that you have a poor track record with credit, it simply means that you haven’t had a chance to prove yourself. From a lender's point of view, it’s still a risk, but it’s not a proven one.

That said, you can still expect to pay more for credit than if you were to have a solid credit history. Having no credit history at all means the lender doesn’t know anything about how you’ll handle your payments, so there is an element of risk involved. But there are some ways to mitigate that risk and potentially get a lower rate.

How to get approved for a loan with no credit history

Your options for getting a loan with no credit can depend on what your goal is with the loan. For example, auto lenders have different criteria than mortgage and personal lenders. Here are some ideas to help you get approved.

Apply with a lender that works with no-credit borrowers

There are several lenders out there — personal, auto, and mortgage — that understand that even people with no credit sometimes need financing. As a result, many lenders specialize in offering no-credit loans. Take the time to shop around and compare lenders and their loan terms.

As you research your options, though, it’s important to know what to avoid. Specifically, steer clear of payday and auto title loans, as these often charge sky-high interest rates and can keep you in a vicious debt cycle.

Also, keep an eye out for scammers who prey on the desperate. If a “lender” asks you to pay upfront fees, do anything involving sending money orders or gift cards, or has a website riddled with grammatical errors, run in the opposite direction.

Take advantage of alternative data

As you probably already know, a credit history — or lack thereof — doesn’t always accurately describe a person’s financial responsibility. Some modern online lenders also understand this fact and are starting to consider alternative credit data.

More specifically, things like your income and overall expenses, savings rate, earnings potential, and retirement balance can improve your chances of getting a loan. That’s because these factors can be evidence of responsible financial behavior.

As as you’re researching lenders, keep an eye out for ones that consider alternative data when making approval decisions.

Make a large down payment

If you’re applying for an auto or mortgage loan, a major factor lenders consider is your down payment. A large down payment not only reduces the amount the lender needs to give you — which decreases its overall risk — but it also shows that you have skin in the game and are less likely to default.

With a mortgage loan, a down payment of 20% or higher can help improve your chances of approval. With an auto loan, there’s no standard amount but the more, the better.

Opt for manual underwriting

If you’re applying for a mortgage loan, it’s possible to avoid having the lender consider your credit at all. With this process, lenders typically try to get as much current and past financial information from you as possible.

For example, you may be required to submit documentation of on-time payments for rent and other monthly obligations for the past year or two. You’ll also likely need to have a large down payment plus a healthy reserve of cash beyond that.

Manual underwriting is an intensive process that requires a lot of paperwork and scrutiny. But the good news is that if your finances are in great shape and you simply have no credit score, you may have a good chance of getting approved.

Get a cosigner

If you have a family member or close friend who has good credit and is willing to apply with you as a co-applicant, it could improve your chances of getting a loan, possibly with a lower interest rate than what you’d qualify for on your own.

Mortgage and auto lenders typically allow co-signers across the board. But some personal lenders require borrowers to apply on their own. So if you’re looking for a personal loan, don’t assume you can apply on your own and then add a cosigner later. Research lenders to find one that allows co-applicants from the start of the application process.

Also, it’s important to understand that as a cosigner, your loved one will be equally responsible for paying your loan. This means that if you default, both your and their credit will suffer some damage. So if you’re going the cosigner route, make sure you avoid breaking their trust.

Get a credit builder loan

If you’re looking for a loan simply to establish a positive credit history, consider getting a credit builder loan. The way these loans typically work is a little different than traditional loans. Once you get approved, the lender sets the loan funds aside in a savings or CD account instead of giving it to you.

You’ll then make monthly payments, typically for up to a year, with interest. Once the loan has matured, you’ll get the loan funds back plus any interest it earned in the savings or CD account.

Credit builder loans are a great way to establish a positive payment history with the credit bureaus and can help jumpstart your efforts to develop good long-term credit habits.

Also, some credit unions and banks offer a savings-secured loan, which can also help build credit. The only caveat is that you typically need enough cash in a savings account with the financial institution to act as collateral for the loan amount.

Borrow from family or friends

Sometimes the best way to get fast cash isn’t through a lender at all. If you have a good relationship with a family member or friend, it may be worth asking them for help.

Keep in mind, though, that borrowing from loved ones can be devastating if things go wrong. As such, it’s typically a good idea to draw up an official agreement between you and them, and consider paying them back with interest.

Your loved one may be more understanding than a lender if you’re struggling to repay the loan, but avoid taking advantage of that fact. Make it a priority to pay them back as quickly as possible.

The bottom line

Having a thin or nonexistent credit profile can limit your options for getting a loan, but it won’t eliminate them entirely. Regardless of how you approach the situation, it’s important to consider why you need the money and whether there are other options.

Take the time to research what’s available to you, and make a decision based on what’s going to cost you the least amount in the long run. In some cases, that may be not borrowing any money at all.

About the author

Ben Luthi is a personal finance writer who has a degree in finance and was previously a staff writer for NerdWallet and Student Loan Hero.

Written on December 19, 2018

Self is a venture-backed startup that helps people build credit and savings.
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Disclaimer: Self is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.

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