If you have bad credit or do not have any credit at all, it will be more difficult to get a loan, but it will not be impossible. There are specific options that will help you build your credit so that you can start working with more traditional loans.
Some financial institutions specialize in low- or no-credit loans. You may find an unsecured loan or one that doesn't require a credit check. You can also find someone to cosign the loan for you.
Continue reading to learn more about credit-builder loans, including how to find them.
What to Know About Credit Builder Loans
Credit-builder loans can help with your credit, but they often come with the cost of higher interest, especially when compared to personal lending. When you have a minimal credit history, it can be difficult to get a loan. A credit-builder loan is an excellent option, as you are more likely to be approved.
As with any other type of loan, you make regular interest payments as well as principal payments. These on-time payments get reported to your major credit bureaus, therefore increasing your credit score.
It is important to remember that on-time payments will benefit your credit score. However, late payments or missed payments will also negatively impact your credit history.
Where are Credit-Builder Loans?
Local banks and credit unions are places people start looking for loans to build credit. You will have better luck when looking online, where there will usually be a larger selection of options for you. Some places to consider looking are Self, Financial Partners, Fig Loans, Digital Federal Credit Union, and 1st Financial Federal Credit Union.
Consider Personal Loans
Don't forget that, depending on your history, you may get lower rates with personal loans, so do not rule them out. If you consider taking a personal loan for credit building purposes, be sure to keep some funds safe to pay the loan back, so it does not end up affecting you negatively.
What are Unsecured Loans?
The short definition of a loan that is unsecured is one that doesn't have collateral attached to it. Car loans and mortgages are secured loans. With unsecured loans, lenders approve loans based on the potential creditworthiness of the person borrowing. This contrasts with secured loans, which use assets to secure the debt. Unsecured loans are credit cards, student loans, and personal loans.
Because unsecured loans, sometimes called personal or signature loans, are secured without property or assets, your credit score is important. Borrowers will need to have high scores to be approved for one of these loans.
Because higher scores are needed, lenders often allow applicants to have cosigners. These cosigners bear the legal obligation of paying the debt off should the borrower default.
Important Points to Remember
Unsecured loans are supported by creditworthiness and not assets. Because there is no property involved, unsecured loans have more potential risk.
For this reason, a higher credit score is needed to obtain one. If defaulted on, lenders may use collection companies for debt collection and even take you to court.
Lenders have the final say in who gets approved for unsecured loans based on credit scores, but laws do protect against discrimination.
Credit Builder Loans With No Credit Check
Credit builder loans are still a new choice and do not all come at the same cost, nor do they have the same quality. If you are looking for a loan and do not want a credit check, there are some options you can look into.
Peer-to-Peer Loans for a Bad Credit Score
This is also considered marketplace lending. These are ideal for individual investors looking to fund private borrowers. This industry has had a steady growth of 32.5% from 2014 to 2019 and currently has an estimated value of $2 billion.
The requirements for this loan do vary, but lenders may not scrutinize your credit score. These loans typically come at lower rates than others and you may get larger amounts spread over a longer repayment time.
Loans for Bad Credit
It is a well-known fact that those with lower credit scores or little credit history have trouble getting loans, but they will still have options. Getting a loan for bad credit online and repaying it is one way of improving your credit score. This will give you more options in the future.
Credit scores tend to improve with age, therefore as you get older you tend to have higher scores. This means that lenders feel you will treat your financial responsibilities better.
If you run into problems getting credit because you have a bad credit score, defined by FICO as 580 and below, there are a few things you can do.
Co-Signers on Personal Loans
One of the quickest ways of securing your personal loan with no credit or bad credit is with a cosigner who has an excellent credit score. When you have a co-signer with excellent credit, your lender has a layer of protection in the event you default. One of the best advantages to these loans for bad credit is that your chances of getting a loan increase with a cosigner. You will also likely have better rates and terms.
Joint Personal Loans
Loans with co-signers have differences and similarities to joint personal loans. Both are for people who struggle with getting a loan because of bad credit. With a joint personal loan, the responsibility of the debt is shared with the borrower and co-borrower. They share the responsibility of paying it back as they share the loan amount. By contrast, cosigners are not entitled to any part of the loan and don't share in repaying unless there is a default.
Personal Loans for Bad Credit
The TransUnion consumer credit report states that personal loans are the fastest-growing lending sector in the U.S. This type of debt has also grown by 19.2% in the last couple of years. These loans also have a low rate of delinquency at 3.47%.
Loans for No Credit
Many people ask if it is possible to get a loan with no credit and the short answer is yes. You will likely pay more in interest with these loans as well.
Payday loans often do not require credit checks. Instead, you need to be able to show your regular income and that you have a bank account. These loans should be the last resort because they come at APRs of close to 400% and above. There are heavy penalties for not being able to pay when payment is due as well. These loans tend to cost you far more than originally borrowed.
No-credit-check installment loans are offered by some lenders online. These give you longer terms to pay off the loan than your next paycheck but still come with heavy interest rates.
There are also some car dealerships that offer "buy-here, pay-here" loans that do not require credit checks. Interest rates are generally much higher than other lenders and dealerships often require you to borrow more than the car's value. These loans cost you much more and should be considered only as a last option.
You may be in the case of no credit because your lenders never notified credit bureaus or because you haven't borrowed money. Either way, this is something that can be worked through.
Payday Alternative Loans
There are a few federal credit unions offering loans as payday alternatives. These range from $200 to $2,000. There are credit unions that offer loans without credit checks. These loans have interest and fees capped, therefore ma\king them more appealing than other loans.
Lenders to Look to When Shopping for No-Credit Loans
In the case of an emergency, you may not have time to build your credit up before applying for a loan. Consider some of the following options.
Oportun
This company says no credit history is necessary for secured and unsecured loans. According to the company, it will check credit but consider more factors. This company reports payment history, therefore helping you build your credit.
Earnin
For those employed, this company may be the right choice. Earnin will advance up to $100 a day or $500 for a pay period. There are no mandatory fees, only tips.
Stilt
This is a lender that focuses on lending to immigrants. You may apply even without a social security number. The company analyzes factors such as education, financial habits, and work habits when deciding to lend.
Brigit
This is another company you can investigate. They do have a membership fee, but you can get up to $250 in advance. Their app gives you auto advances and a spending tracker to predict if you will go overdraft your account and therefore need money in a hurry.
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Conclusion
If you have no credit or bad credit, you will still be able to find a loan. However, it will be more challenging, and you are likely to have a higher interest rate. Unsecured loans will not require collateral, or you can ask someone to cosign your loan for you.
When possible, it is always wise to avoid payday loans, as they have incredibly high-interest rates and fees. Instead, look for a loan with a lower interest rate and work to boost your credit score. The good news is that paying off your loan on time will improve your credit score and make getting loans easier in the future.
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Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.