Taking out a loan without any credit history can be more complicated, be it a payday loan, mortgage or any other loan; however, it is not impossible. If you are worried about your lack of credit history and how it may affect your chances of being able to borrow money online or from traditional lenders, there are a number of steps you can take to try to improve your situation.
What Should You Do If You Want a loan But Have No Credit?
If you have no credit history, your first step should be to research the different lenders available to you. Although not all lenders will lend to borrowers who lack a credit history, there are plenty that will so your first step would be to identify lenders who are willing to lend to those with no credit history.
When comparing different loan providers, you should think about your specific financial needs. Using loan comparison sites, you can compare different factors such as interest rates, fees and repayment terms.
Once you have compared the different options and made your choice, you can fill out an application for the chosen lender. More often than not, you will need to provide accompanying documentation such as bank statements or pay stubs. It is possible that if you are applying without a credit history, lenders could ask for additional documentation, such as employment history or bank statements, to demonstrate your incoming and outgoing expenses.
What Happens If You Are Not Approved For a Loan?
Lack of credit history could, in some cases, prevent you from being approved for a loan. However, there are still different options available.
If you enlist a cosigner, perhaps a friend or relative, you can improve your chances of being approved for a loan (source: Kallyss). Finding a cosigner with good credit can help assure lenders that someone can make the repayment. Asking someone to cosign your loan means that they are agreeing to repay the monthly repayment should you default the payment. This option has fairly high stakes as it risks not only damaging both the borrower and the co-signer’s credit, it could also damage a familial or friendship relationship.
Borrowing money, in a similar vein, will rely on enlisting help from a trusted friend or relative. The option of borrowing money is a way of avoiding the strict lending criteria and assessment that comes with applying officially for a loan. Not only that, you will avoid the high interest rates offered by loan providers. However, like the cosigner option, borrowing money from a loved one has the potential to damage your personal relationships in the event that anything should happen.
Applying for an unsecured loan is always more of a risk for lenders as, if the payment is late or defaulted, the lender is stuck.
For this reason, the option of a secured loan may be better. With a secured loan, the borrower needs to put up a form of collateral such as a car or a valuable item. This makes the loan less risky for the lender as, should payments not be met, they can repossess the collateral. Due to their less risky nature, those who lack a credit history may be more likely to be approved for a secured loan.
Another option may be to explore cash advances. In certain companies and organisations, you may be able to approach your employer and ask them to advance your cash. A cash advance is a way of advancing your next paycheck so that you are receiving some of the money before your payday. Upon your next payday, the value borrowed will be deducted from the total
Is It Sensible To Take Out a Loan If You Have No Credit History?
Taking out a loan may be a good option if you are seeking quick funds; however, it is more difficult to obtain a loan with no credit history and you might be an easy target for predatory lenders.
Predatory lending refers to the process of offering loans to individuals who typically find it more difficult to secure a loan and offering them loans with high interest rates; in most cases, the borrowers are unable to repay these loans and subsequently get trapped in a nasty cycle of debt. The types of loans most commonly associated with predatory lending are pawn shop loans, payday loans and cash advance loans.
In the case of a property and secured loans, it may be the case that without much credit history on record, a borrower may find it hard to borrow the money they need in the form of a mortgage (source: ProperEaze). In such cases, alternative lenders and finance providers may need to be considered.
Can You Build Credit If You Do Not Have a Credit History?
It is never too early or too late to start building a credit history. There are multiple ways to do this, all of which will open many different financial opportunities for you in the future, be it making it easier to be approved for a loan, take out a mortgage or purchase a car.
To start building a credit history, a sensible first step is to apply for a secured credit card. These cards have a security deposit which acts as a collateral so that if you are unable to pay the balance, the providers of the card can use this value. Regularly meeting payments on your credit card will start positively building credit which will then be reported to national credit bureaus. If you are able to make regular payments and show a low cost utilisation ratio, you start building up your profile as a creditworthy individual and reliable borrower.
Once you start building a credit history, it is your responsibility to check your credit score and make sure that everything is correct. Errors on your credit history are fairly common but can easily be amended so make sure to be alert for any potential mistakes. Tracking your credit history will also help you assess whether your efforts to build credit are working or not.