6. April 2021|9 minutes read
What you should know if you don't have a credit history and are considering applying for a personal loan.
6. April 2021|9 minutes read
Looking to finance a purchase that doesn't fall into a credit category like a mortgage or car loan? Somepersonal loanscan finance all sorts of things because of the freedom they give a borrower.
But without a credit history, it can be difficult to get a loan, according to the Consumer Financial Protection Bureau (CFPB). However, that doesn't mean there aren't any options. Read on to learn more about how to get a personal loan even if you don't have a loan yet.
How do personal loans work?
Personal loans are offered by all types of lenders, including traditional banks, online banks, and peer-to-peer lending sites. Many advertisepersonal loansas relatively small, unsecured loans that allow borrowers to spend money as they see fit. This means that lending decisions are based on creditworthiness and not backed by collateral like a car or house.
However, lenders may have their own definitions. And some lenders may offer secured loans. And some loans, such asPayday or title loan, may have additional risks or be more expensive. Therefore, make sure you fully understand the terms of a loan agreement before committing to it.
What does it mean to have no credit?
You can think of credit history as a track record of how someone handles debt. According to the CFPB, it covers past debt and current status. The agency says information is being compiledcredit reports. And these reports can then be used for calculationCredit Scores- and to assess how likely it is that a person will repay a loan in the future.
But when someone has little or no credit history, it's difficult to do any of this, which can make accessing credit a problem. It's more common than you might think. According to the latest CFPB research, nearly 20% of US adults are affected by a lack of credit history. The CFPB refers to them as "Credit Invisible" or "Unscorable".
It helps to know this havingNo credit is not the same as bad credit. And people can be invisible or unevaluable as credit for a number of reasons. You can also call it a thin or insufficient credit file. And that can have several reasons. Here are a few:
- You have never applied for a loan or credit card in the past.For example a younger person starting their own business for the first time or someone who has just moved from another country.
- Your credit accounts have no current activity.The CFPB calls this a stale file. If no activity is reported within six months of a credit score being calculated, it could affect the score.
- Your credit accounts are closed.This is another example of an outdated file. You could see this happening with theCredit of a married person. Getting married doesn't automatically combine a couple's credit histories. So if someone who used to have accounts of their own closes them after the federal government, it could affect their creditworthiness.
- You have credit, but your account was recently opened.There are many factors that go into timing, but the CFPB explains that it can take six months -- sometimes longer -- for a new credit account to be evaluated.
- Your credit history will not be reported.There are several credit bureaus that produce credit reports. And there are multiple credit scores and scoring models. If credit activity is not reported to all bureaus, an individual cannot be rated, depending on which report and rating model is used.
When it comes to borrowing, having little to no credit history can be difficult. But credit invisible doesn't automatically mean a personal loan is unattainable.
Is a loan without a loan possible?
Because personal loans can be based on creditworthiness, a lack of credit can make approval difficult. And available credit may come with higher interest rates, which can increase borrowing costs.
If you can't get a personal loan on your own, or the interest rates are too high, you may be able to find a co-signer. According to the CFPB, a co-signer provides lenders with additional guarantees. That's because a co-signer agrees to pay back the loan if you can't.
But it is important to have mutual trust with your co-signer. Any negative actions could end up in both of your credit reports.
It takes time and responsible behavior, but another way to make yourself more attractive to a personal loan is to take out a personal loanBuild your creditbefore applying.
Alternatives and credit building methods
If a personal loan is not an option now, there may be alternatives. And some might even help you build credit if you make payments on time every month, for example. Unfortunately, credit cannot be built up overnight. But with patienceresponsible habits, the followingmethodscould get things rolling.
- Secured Credit Cards:Asecured cardgets its name from the deposit required after your approval. The security deposit is similar to what you pay a landlord before you rent an apartment. Once you have a card like thatCapital One Platinum Secured-Karte, you can use it to shop like you would with a conventional card. Deposit amounts and credit limits vary by secured card and issuer. This also applies to the conditions that decide when a deposit can be refunded.
- Credit cards for students:Start building credit while still a student and lay the foundation for future goals, such as: B. buying a house. ManyCredit cards for studentswere created with young people in mind who are new to credit. They often work just like a conventional credit card. And some like thatJourney Student Card von Capital One, even offer cashback bonuses.
- Authorized User:You could become aauthorized userwhen a loved one or someone you trust gives you access to their credit card account. You may get your own card, but the original cardholder is ultimately responsible for making monthly payments. If the account is used responsibly and this activity is reported to the credit bureaus, it can help you build credit as an authorized user. But be aware: negative actions could damage your credit score.
- building loan:Aconstruction loandoesn't work like a personal loan as you don't get the same quick access to cash. But the CFPB says it's a way to build credit. The loan works in reverse as you might expect. Money, typically between $300 and $1,000, is deposited into a secure account. The borrower then pays off the amount in installments over a set period of time, usually between six months and two years. As payments are made, they are reported to credit bureaus. And once the sum is reached, the borrower gets access to the account.
When you find a method that works for you, remember that it's important to be responsible with your finances. It's important to make sure you borrow responsibly and keep up with all your bills. In some cases payto rentorother billscan even help you build credit.
How to monitor your creditworthiness
Without a credit history, your personal credit options could be limited. And the loans you are offered may come with higher interest rates. But if you can take the time to build up a good credit score before applying for a loan, it could be beneficial.
To see where you stand, you can get copies of your credit reports from the three major credit bureausAnnualCreditReport.com.
You can also check your credit score using a tool such asCreditWise von Capital One. This gives you weekly access to your TransUnion® credit report. And you can see your VantageScore® 3.0 credit score as many times as you like. Also, the built-in CreditWise simulator can help you see the potential impact of taking out a personal loan.
Best of all, it's free for everyone to use and usage doesn't affect your balance.
We hope you found this helpful. Our content is not intended to provide legal, investment or financial advice or to suggest that any particular Capital One product or service is available or suitable for you. You should speak to a qualified professional for advice specific to your particular circumstances.
Your CreditWise score is calculated using the TransUnion® VantageScore® 3.0 model, which is one of many credit scoring models. It may not be the same model your lender uses, but it can be an accurate measure of your creditworthiness. The availability of the CreditWise tool is dependent on our ability to obtain your credit history from TransUnion. Some monitors and alerts may not be available to you if the information you enter during registration does not match the information on your credit file with one or more credit reporting agencies (or you do not have a file with).
The CreditWise simulator provides an estimate of your score change and does not guarantee how your score may change.
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Because personal loans might be based on creditworthiness, having no credit can make it more difficult to get approved. And available loans may come with higher interest rates, which can increase borrowing costs.What is the easiest loan to get approved for? ›
The easiest loans to get approved for are payday loans, car title loans, pawnshop loans and personal loans with no credit check. These types of loans offer quick funding and have minimal requirements, so they're available to people with bad credit.Can I get a loan with a credit score under 500? ›
You may qualify with a poor credit score as low as 500, but you must also satisfy several other requirements to get an FHA loan guarantee. These loans require a 10% down payment (or 3.5% if your credit score is above 580), mortgage insurance, and a monthly payment for the life of the loan.Can you get a 20000 loan with no credit? ›
You should have a 640 or higher credit score in order to qualify for a $20,000 personal loan. If you have bad or fair credit you may not qualify for the lowest rates. However, in order to rebuild your credit you may have to pay higher interest rates and make on-time payments.Who will give a loan to anyone? ›
- Banks. Taking out a personal loan from a bank can seem like an attractive option. ...
- Credit unions. A personal loan from a credit union might be a better option than a personal loan from a bank. ...
- Online lenders. ...
- Cash advances. ...
- Cash advance from credit card. ...
- Buy-now, pay-later apps. ...
- 401(k) retirement account. ...
- Family and friends.
If you need to borrow money immediately, the most popular options are personal loans, cash advances online, payday loans, pawn shop loans, and banks or credit unions. But be careful with cash loan options that promise you a quick loan with no credit check.What is the lowest credit score for a loan? ›
Generally, borrowers need a credit score of at least 610 to 640 to even qualify for a personal loan.