How to Get a Loan Without Credit History
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Americans are taking on more debt as the economic situation at home takes a turn for the worse. As the Federal Reserve raised interest rates by 1.5%-1.75% in July to curtail the spiral, consumer credit rose at a seasonally adjusted annual rate of 4.7% in July 2022. Revolving credit was up 8.1%, while nonrevolving credit increased at an annual rate of 5.2%.
Getting a loan without a credit history isn't outside the realm of possibility. But just like other forms of credit, lenders will evaluate your creditworthiness by factoring in your credit scores and credit history. If you don't have one, you can expect to receive unfavorable loan terms such as a higher interest rate. But, there are many loan options available for people with no credit history. In general, payday lenders issue no-credit-check loans, which are unsecured loans, meaning you don't have to put up collateral.
Related: Best Credit Repair Companies
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What is a credit score
A credit score is a three-digit number between 300 and 850 representing your credit risk (aka the probability of you paying back a loan on time). In other words, your credit score represents your creditworthiness which tells lenders if you'll default on a loan or not. The three major credit bureaus in the U.S. are Equifax, Experian, and TransUnion. Your credit score is categorized as follows:
- Poor credit is a score of 629 or below.
- Fair credit means your score is between 630 and 689.
- Good credit is a score that falls between 690 and 719.
- Excellent credit is a score of 720 or higher.
Your bill-paying history, current debt, types of loan, number of loan accounts, and your credit utilization are the data points used to calculate your credit score. A high score means you have practiced responsible credit behavior, making lenders confident in your ability to repay the money promptly. There are many free credit report providers, including AnnualCreditReport.com, which lets you request one credit report annually per major bureau.
Use Quicken Loans to Get a Personal Loan
- If you're tight on cash right now, you may want to consider getting a personal loan. A personal loan is a loan that you can use for just about any purpose like: paying off other debt, renovating your home, or family needs like a wedding or adoption.
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Why credit scores matter
Creditors' decision to grant you a mortgage, credit card, auto loan, personal loan or any other product depends on your credit score. It also determines the annual percentage rate (APR) and the interest rate on any loans. The higher the credit score, the easier it will be for you to qualify for funds at favorable loan terms. In addition, a good credit score also leads to lower payments.
But if you have a bad credit score, you will be less likely to qualify for a loan, and even when you do, you'll be scrutinized more and charged higher interest rates.
Loan options for people without a credit history
Online lenders
Online lenders differ slightly in their underwriting practices compared to traditional financial institutions. In addition to the usual items, online lenders also look at a few other factors to determine your creditworthiness, such as your income, employment history and education, to name a few. As a result, online lenders are suitable for individuals borrowing money for the first time.
Secured loans
If you have a property to offer, you may be able to get a secured loan. For example, you can pledge your car as collateral or valuables like savings certificates. While you may be able to get a loan with lower interest rates and flexible terms, the lender may take over the collateral to cover its costs if you default on the loan.
Cash advances
Cash advances are short-term loans. The money has to be paid back to the lender as early as two weeks, which is when most people's paychecks come in. All that's required is to connect your bank account with your app of choice. You can get approved for a few hundred dollars in most cases, but some cash advance apps will give your 100% of your salary in advance.
Family and friends
If you need financial assistance, you can turn to friends and family for help. A loan from a family member or a friend will likely come with low interest rates and favorable terms. Make sure everything is in writing, such as the loan amount, interest rate, repayment structure, and other details, before taking the money to avoid damaging personal and financial relationships.
Peer-to-peer loans
Also known as person-to-person loans, these loans are taken from people outside your social circle. While that may sound like an odd practice, P2P loans have existed since 2005. And they work much in the same way as a traditional loan through a bank or credit union. Platforms such as Prosper and Lending Club connect borrowers with lenders. While this type of loan may charge high interest rates, there is a high chance you'll get approved even without credit history or a poor credit score.
Use Quicken Loans to Get a Personal Loan
- If you're tight on cash right now, you may want to consider getting a personal loan. A personal loan is a loan that you can use for just about any purpose like: paying off other debt, renovating your home, or family needs like a wedding or adoption.
- TrustPilot Rating 4.6 out of 5
- Connect with lenders for $0
- 100% online experience.
How to build credit
Become an authorized user
An authorized user is added to another individual's credit card and is a quick way to build credit. As an authorized user, you're not liable to make any payments because the card isn't in your name, but as the primary user makes timely payments, these good credit habits will be reflected in your credit report. However, before you choose someone, ensure they have a positive credit history because otherwise, their bad credit habits will negatively affect you.
Get a credit builder loan
As the name suggests, credit builder loans exist solely to build your credit. But the way a credit-builder loan works is wildly different from other loans. Instead of you receiving the lump sum, an account is created where you deposit money each month until it has reached the loan amount. Then, you'll be given the money back. Think of it as forced savings, if you will. And yes, your payments are reported to the credit bureaus.
Practice good credit habits
Credit scores aren't built or improved overnight. Getting the desired result takes time, effort, and good habits. In general, you can do a few things to get at your target:
- Timely payment: Paying your monthly installments on time has a 35% weightage in your credit score, making on-time payments the most significant factor affecting credit scores. To ensure you're always current on any payments, you should set up automatic payments. If you've forgotten to pay or couldn't for other reasons, contact your lender and try to work out an arrangement before it is reported to the credit bureaus.
- Keep credit utilization in check: This has to do with the amount of available credit you can use, also known as a credit limit. To improve or build your credit score quickly, it is recommended to keep your credit utilization below 30% of the limit. The lower the utilization, the better your score will be.
- Say no to multiple cards: Applying for more than one credit card is not preferable. Lenders can turn down your credit or loan applications for the same reason: constant credit checks might lower your credit score and damage your credit history. Keeping a time window of a minimum of 6 months between applying for credit cards is advisable.
Use Quicken Loans to Get a Personal Loan
- If you're tight on cash right now, you may want to consider getting a personal loan. A personal loan is a loan that you can use for just about any purpose like: paying off other debt, renovating your home, or family needs like a wedding or adoption.
- TrustPilot Rating 4.6 out of 5
- Connect with lenders for $0
- 100% online experience.
The bottom line
A credit score is a numeric representation of your ability to maintain your creditworthiness and repay debt. The minimum credit score is 300, but it goes all the way to 850, and you should strive to be on the higher side. The better your credit score, the more financial opportunities will be available. Online lenders, P2P loans, cash advances, and secured loans are some options you can consider if you do not have a credit history yet. And you can build credit by becoming an authorized user, acquiring credit-building loans, and establishing healthy credit habits.
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Writer
Jasir Jawaid is Joy Wallet's Assistant Editor. He has more than 13 years of experience as a journalist covering Wall Street, equities, financial policy and regulation, and cryptocurrency and blockchain.
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