First Time Loan with No Credit? Here Are Your Options
How do you get a loan when you have no credit? The main way banks and other lenders decide whether you can borrow money is by checking your credit report.
If your credit report has nothing on it, you might think they’d say, “Hey! This person has perfect credit! They’ve never taken out a loan that they haven’t repaid!” But you’d be wrong because the system doesn’t work like that.
Instead, we live in a world where to get credit, you need to have credit. The way you prove you’re a trustworthy borrower isn’t by avoiding loans and credit cards. It’s by taking out loans and opening credit card accounts, then paying back what you borrow.
If this reminds you of trying to get your first job when you have no experience — but no employer wants to take a chance on you because you have no experience — then you understand how credit works, too.
But just as some employers will hire people with no experience, some creditors will lend money to people with no credit history. It’s important to know your options so you can find the best deal on a loan. Plus, knowing that you do have options makes you less likely to become a victim of a predatory lender.
No Credit? Get a Cosigner
Do you have a friend or relative with good credit? Would they be willing to cosign a loan or a credit card application for you? If so, you have a great opportunity to establish good credit in your own name.
A cosigner is someone who agrees to repay what you borrow if you don’t. It’s a real, legal obligation that can affect your cosigner’s credit and finances as well as yours.
Once you’ve built up about a year of good credit history, you can apply for a new loan or credit card with no cosigner. You can also ask your lender or credit card company for cosigner release.
Cosigner release allows you to keep the same account but let your cosigner off the hook. Not all lenders offer cosigner release, though.
If you get a cosigner, it’s extra important to make all your payments on time. If you don’t, you’ll damage not only your own credit but also your cosigner’s. Even worse, you’ll hurt your relationship and lose your cosigner’s trust.
What kind of loan can you get with a cosigner? Options include private student loans, small personal loans, car loans, and home loans.
A small personal loan may be your best bet because it is the least risky for your cosigner. But, many parents are willing to cosign for a child’s student loan, car loan, or mortgage — if their child has proven that they’re responsible.
Another Option: Get a Secured Credit Card
A secured credit card is one where you make a cash deposit with the credit card company. This cash deposit will be the same amount as your credit line.
If you want a $200 credit line, you’ll give the credit card company $200 as a refundable security deposit. The credit card company is taking almost no risk since it can keep your security deposit if you don’t pay your bill. It will refund your deposit when you close your account as long as your balance is paid in full.
If you have no credit, a secured credit card might be the best way to establish credit. You don’t need a cosigner, so you’ll avoid any awkwardness that can come with mixing money and relationships.
Getting a secured credit card is also a free or low-cost way to establish credit. Try to get a card with no fees.
The most important factor is that the card issuer reports your payments to all three major credit bureaus: Equifax, Experian, and TransUnion. It’s this information that will help you pass future credit checks.
Don’t carry a balance, don’t make any late payments, and you will be on your way to establishing a good credit score.
What About Getting a First-Time Car Loan with No Credit?
Getting a cosigner can be the easiest way to get a first-time car loan with no credit. But what if you don’t have a cosigner?
It won’t be easy. You’ll need to prove you earn a steady paycheck that’s big enough to cover the car loan and your other financial obligations.
The lender may also require a down payment. The more of the car’s purchase price you can pay upfront, the less you’ll need to borrow. That means less risk for the lender, which means a better chance of getting your first car loan.
Also, do you have a good nest egg in a savings account? Proof of savings can be another way to show an auto lender you’re trustworthy.
Can You Get a First Time Homeowners Loan with No Credit?
Getting a first time homeowners loan with no credit isn’t as tricky as you think. In fact, you might have an easier time getting a mortgage than another type of loan with no credit. That’s kind of funny considering how huge a mortgage is, compared to a small personal loan.
One reason for this is that property secures a home loan. If you don’t repay the loan, the lender isn’t going to lose all the money you’ve borrowed. They can seize your home through a process called foreclosure, then sell the home to get their money back.
You don’t want this to happen, of course. Losing your home is a terrible experience, and foreclosure can really hurt your credit. But loans with collateral can be easier to get.
There’s a mortgage for people who would have a hard time buying a home without special consideration. It’s called a Federal Housing Administration mortgage, or FHA loan.
FHA lending rules allow lenders to look at payments that don’t show up on your credit report, like rent and utility payments. If you can show a history of paying these bills on time, you’ll have a shot at FHA loan approval — even with no traditional credit history.
You’ll still have to meet the other loan terms to get a mortgage. For someone with no credit, the most important of these loan terms is a steady income. Your income must be high enough to pay the mortgage, homeowners insurance, and property taxes.
Establish Credit with a First-Time Loan
Borrowing money is not difficult in the United States today. Just a few decades ago, women couldn’t open their own credit card accounts. Today, almost any American adult can borrow money if they understand how the credit system works and if they know where to look — and now you do.
What will your credit score look like after that first loan? A key component of your credit score is having a mix of different types of credit, and another key component is the length of your credit history. Getting your first loan may help you establish decent credit, but it may not help you establish excellent credit right away.
Over the years, you may take out a mix of student loans, auto loans, credit cards, and a mortgage. These different types of borrowing, combined with a history of on-time payments and not maxing out your credit cards, will help you achieve that excellent score that makes it easy to borrow and get the lowest interest rates.
For a small, first-time loan with no credit, a secured credit card or cosigned loan might work for you. If you want to make a major purchase, like a house or a car, an FHA home loan or first-time car loan are possibilities.
Just because you don’t have credit doesn’t mean you don’t have options. Shop around and see which lenders and credit card companies can get you the money you need with the fewest fees and lowest interest rate.
Repay that loan responsibly and, as long as the lender reports your payments to the major credit bureaus, you’ll be able to establish good credit and expand your options for borrowing in the future.