How to Get a Loan With No Credit

Borrowing money is a way of life these days. While many would argue that it shouldn’t be, the truth of that matter is that at some point just about everyone needs to receive a little extra help to get back on their feet, whether they are dealing with layoffs, getting hassled by creditors, or are in need of medical assistance.

The hardest thing for many people is getting a loan with no credit. The paradox, or catch-22, is that a person needs credit history, or proof that he can pay off a loan, in order to get approval from a lender, but without having borrowed in the past, how can one prove such a thing? A person can’t seem to get a loan without having borrowed, but this same person cannot borrow without having first been the recipient of a loan.

It seems confusing to say the least, but getting a no credit loan is not impossible if someone can follow the other rules that determine who would be a good candidate for lender approval.

Getting a No Credit Loan

In order to secure a loan, whether it is a VA mortgage with no money down, an auto loan, or fast cash from a payday lender, one should understand the 5 C’s of credit, which are:

  1. Character
  2. Capacity
  3. Capital
  4. Collateral
  5. Conditions.

If a person is known to lack the character to honor a contract, the rest of the Cs don’t matter to a lender, but if a person has character, it won’t guarantee him a loan, especially with no credit.

In order to secure a loan, one needs capacity, which is money coming in. If a $5,000 loan is going to be paid off in two years, the borrower will have to show that he has at least $300 in disposable income each month to make the payment. And if that income was to go away unexpectedly, he’d need to show that he had the capital in his net worth, which can be found on a balance sheet.

Collateral (something he could sell) or cash is always a strong way to prove one is a worthy loan candidate, but this may not hold much weight if the conditions are not right, such as if the borrower is unemployed and the economy is only getting worse.

Join a Credit Union

One way beyond satisfying the above conditions to obtaining a loan with no credit is to join a local credit union. Credit unions are built more in line to serve the people of the bank rather than to simply focus on the bottom line. While they will not take unnecessary risks, they will offer advice on how to build credit, and they can offer loans based on one’s collateral and capacity.

Obtaining credit when one has none does not have to be hard. By following the formula of satisfying the 5 Cs, credit will be easy to find.

Payday Loans: “Just Say No”

Payday loans are touted by media ads as a short-term solution to meeting unexpected expenses. Generally consisting of a relatively small loan or cash advance designed to be repaid by the customer’s next pay check, usually in two weeks. The customer writes a post-dated check for the amount of the loan plus fees. The payday lender gives the customer cash and holds the check until the two week period has expired. If the customer has not returned to repay the loan, the lender deposits the check. Sounds fair enough. But is it?

True cost of a cash advance

Let’s start with those fees. Usually between 15% -30% of the amount borrowed, this means the customer borrowing $300 will write a postdated check for $345 – $390. This amounts to an annual percentage rate of 390% – 780%. Still sound fair? But there’s more. What if that postdated check is deposited and the customer doesn’t have sufficient funds to cover it? They will incur an additional fee, usually around $30, from their banking institution. If this fee causes other checks to bounce the charges can quickly spiral out of control.

Don’t payday lenders provide a way to avoid this?

As a “solution” to this problem, payday lenders will often allow a customer to stop by the office and pay an additional service fee, again 15%- 30% of the original amount borrowed, to “roll over” the loan for an additional two weeks. This “solution” means the customer has already paid between $90- $180 in fees to borrow $300 for one month!

Alternatives

And who are the targeted customers for this so-called “helping hand”? Usually those of very modest incomes who can least afford to be taken advantage of in this way. Not coincidentally, they are also those with the least clout when it comes to demanding consumer protection. But there is hope.

Some states have banned payday lending, or made the loans impractical by severely limiting interest rates. But does removing this option mean that someone who needs help simply has nowhere to go? No, it doesn’t.

Some financial institutions, especially credit unions, have established short-term lending programs to fill this gap. Often without the need for a credit check, borrowers can obtain a small advance at a reasonable rate, with a repayment term they can actually meet. These small loans have the added benefit of providing the borrower a reported credit history, something payday loans do not.

So, if you find yourself in need of short-term help – contact your bank or local credit union. There are options out there. Don’t fall into the hands of predatory payday lenders.

What’s Behind a Credit Report?

We all hear about credit reports and how important they are to you. The better yours is, the more money you can save if you need a loan or any other type of credit. Even insurance companies are now taking a look at credit reports when deciding on your premiums for the year. Let’s face it, we are not considered people anymore, we are considered a number – and that number is our FICO score.

It’s important for you to know what’s on your credit report. Identity theft is on the rise, and you want to be sure you haven’t become a victim. Even simple things can show up, a store might have made an error, a bill maybe never made it to your new address, the reasons could be endless. Most Americans have no idea on what’s listed! You are entitled to a free report every year, from each of the three major reporting companies, which include Equifax, Experian and TransUnion.

What are scores and what do they mean? A score at its lowest starts at 300. If your number falls in between 300 and 549, chances are you’re not going to be able to get that loan you were hoping for. You are considered a very high credit risk. Sometimes, it can be as simple as not having any credit; it doesn’t mean that you haven’t paid your bills.

From 550 to 699, you are considered a medium risk. You might get the loan, but you will most likely have to pay a higher interest rate. From 700 to 850, you should have an incredibly smooth loan process and you’ll receive the best interest rates.

Several different things, including no history of debt, high debt compared to income and your payment history, can determine your score. What helps is if you pay your bills on time, only hold 2-3 credit cards and keep the balances below the limit. Paying more than the minimum due will also help. Establish a long term credit history if you can.

What will hurt you is if you have too many credit cards or none at all. High debt and delinquent accounts, bankruptcy and charge offs are some of the worst to have.

If you have bad credit, don’t despair. It won’t follow you around forever if you start on the right track today to get it straightened out. Do your best to pay your bills on time, and make sure you get your annual credit reports so you know what is on there. Know your score, and do your best to maintain and improve it. While I’m not advocating taking out loans, a fact of life is sometimes we need them!