Life happens. And despite making savvy money moves and routinely growing your savings, unforeseen expenses – like medical bills, big emergencies or car repairs – can derail even the most well-planned budget and savings plan. When life happens, you may need to take out a personal loan to cover the cost.
But how can you get a personal loan if you don’t have any credit?
Fortunately, you can get a small personal loan with no credit. Let’s explore your options and help you make a plan to build credit for the future.
Can I Get a Personal Loan if I Don’t Have Credit?
If you have no credit, you can qualify for small personal loans, but you’ll likely deal with higher-than-average interest rates and unfavorable loan terms. Typically, these loans have higher-than-average interest rates and unfavorable loan terms.
When a lender works with a borrower who has a credit history, they run a credit check and use their credit score to determine how reliable the borrower is at paying back debt (aka creditworthiness). Without that history, lenders can’t judge how likely it is that a borrower will repay a loan as easily.
However, lenders can look at more than credit scores to see if you qualify for a personal loan. They can look at your employment history, income, bank account balances and debt-to-income (DTI) ratio.
BTW, it’s important to note that no credit is different from bad credit. Since credit history is a track record of how you’ve handled debt, having no credit could just mean that you’ve never applied for credit or you closed all your accounts. When you have bad credit, it could mean that you have a poor record of paying off your debt or you maxed out your credit limit.
If you need a small personal loan and you’ve got no credit, you should be able to qualify without worrying about a credit check. If you need a bigger loan, like a $15,000 loan, your best option may be to borrow from friends or family or get a co-signer.
Types of loans
Most personal loans are unsecured. Unsecured loans aren’t insured or backed up by anything of value (aka collateral).
- Online loans: Many online lenders offer small personal loans. You’ll be asked to provide proof of employment and bank account balances. Online loans are the easiest personal loans to get with no credit.
- Credit unions: Credit unions may have more flexible loan options. They may be more willing to qualify customers with no credit for loans. To get a loan from a credit union, you’ll need to be a member.
- Peer-to-peer (P2P) loans: It’s a unique system that allows individuals to borrow directly from other individuals, cutting out any intermediaries.
There are also two types of secured personal loans you can apply for. Secured loans require borrowers to put up collateral. Collateral is an asset – like a car, house, boat, etc. – that secures or insures a loan.
Secured loans are riskier than unsecured loans because the borrower has something to lose if they default on the loan (aka miss payments). You should only consider a secured loan if you can’t qualify for an unsecured loan, and you’ve exhausted all other options.
- Payday loans: Payday loans are typically small, high-interest loans (usually $500 or less) that are required to be paid off by your next payday. Because of their exorbitant fees and interest rates and short repayment terms, payday loans can be very expensive for borrowers. To repay the loan, you’ll either write a postdated check for the loan amount or authorize the lender to withdraw the money from your bank account.
- Title loans: Your vehicle (a car, motorcycle, truck or boat) can be used as collateral for a title loan. For example, a car title loan gives you a loan in exchange for the title to your car. Title loans are expensive. And if you miss payments (aka default on the loan) you could lose your vehicle.
Payday and title loans are easy to get. But they should be avoided because they’re risky. In fact, some states have made these loan types illegal and consider them predatory lending because of their high interest rates and fees.
Steps to Apply for a Loan With No Credit History
Applying for a loan with no credit looks no different from applying for a loan with credit, the lender simply gives more weight to different financial information. You’ll still need to follow the same four steps.
- Research and compare: Take a look at unsecured loans and compare loan terms before you apply. Let your finances be your guide as you decide what’s best for you.
- Pick your loan: Once you get a few quotes from lenders, you can make an informed decision. Compare interest rates, fees and loan terms, then select the loan that’s right for you.
- Prepare financial documents: Gather all the financial information you’ll need for the application ahead of time. In general, you’ll need to provide proof of identity, address and income and bank statements.
- Complete the loan application: Once you’ve filled out and submitted your loan application, your work is done. Now it’s up to the lender to decide whether to approve your application.
What Are My Other Options if I Can’t Qualify for a Loan?
If you can’t qualify for a personal loan, you’ve got other options you can explore. There are ways to get the money when you need it in a pinch!
Find a co-signer
Ask a trusted family member or friend to co-sign your loan.
Recruiting a co-signer with good-to-excellent credit will likely help you get approved for a loan and may even help you qualify for better rates. Just make sure your co-signer understands that the loan will impact their credit history and credit score. And if you can’t repay the loan, the co-signer is legally responsible to pay it back.
Borrow money from someone
You probably have a friend or family member who’d be willing to help you out in an emergency.
If that’s the case, ask them for a loan and make it official by writing out the terms of the loan, including how you’re going to pay back the loan and how much they’re charging in interest (if they’re charging any interest).
This might sound super formal for an arrangement with someone you love or trust, but it’s important for two reasons: 1) It will protect your relationship from any misunderstandings, legal or otherwise. And 2) You may need to account for the money when you file your taxes.
Ask for a cash advance from your employer
If your employer offers payroll advances, you may want to ask for a cash advance on your paycheck.
Look to nonprofit programs for help
Many nonprofit organizations provide support to people in a financial pinch. Ask around or search for charities and community organizations. Maybe when you’re back on your feet you can pay the kindness forward.
How Do I Establish Credit if I Have No Credit History?
There may be a few reasons why you haven’t established a credit history.
- You’ve never applied for a loan or credit card.
- You didn’t take out a student loan, or a parent took out a Parent PLUS loan on your behalf.
- Your credit account was opened within the past 6 months.
- There’s been no activity on your credit account in over 6 months.
- Your credit account was closed (people sometimes close their accounts after getting married).
- Your credit isn’t being reported.
If any of these situations apply to you, it’s time to start building your credit history. Remember, when you have a credit history, it’s easier for lenders to assess how likely you are to pay back a loan.
As you build credit, you should monitor your credit score with each credit bureau to make sure your credit score is climbing. You’re entitled to a free credit report from each credit bureau once a year. You can order your credit reports at AnnualCreditReport.com.
Let’s look at a few ways you can start establishing credit.
Apply for a secured credit card
Secured credit cards (aka credit-building cards) require an initial deposit that usually establishes the card’s credit limit. A secured card works like a regular credit card. Credit bureaus will use the payments you make on the secured card to build your credit history.
Become an authorized user
Rather than apply for a credit card, you could become an authorized user on the credit card of someone you know and trust. Essentially, your credit will benefit from the primary cardholder’s good credit history. But, if they make late payments or miss payments, it could hurt your credit. Depending on the credit card company, an authorized user may receive a card, but they’re not responsible for paying the monthly statements. That’s the responsibility of the primary cardholder.
Apply for a store credit card
Store credit cards have more lenient qualification requirements and can help you build a credit profile. However, they can have higher interest rates, lower credit limits and limited usability.
No Credit, No Problem
Having no credit doesn’t have to be a cause for major concern. There are many valid reasons why you may have no credit or a thin credit report. What matters is what you do about it. Prioritize building credit for the future, and when life happens, find a personal loan (or personal loan alternative) that helps, not hurts, your finances.
Consumer Federation of America. “Legal Status of Payday Loans by State.” Retrieved April 2022 from https://paydayloaninfo.org/state-information/