How to Get a Loan With Bad Credit or No Credit
Learn what steps to take to get a loan even with less-than-stellar credit.
- March 25, 2020
- 11 min read
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Having bad credit or no credit can make getting a loan very difficult, if not impossible. One of the principal factors lenders must consider is risk and when a potential borrower has bad credit or no credit history, this is an instant red flag. Even if you do have some credit activity, your credit file could be described as thin, which could lead your loan application to be rejected.
The good news is, getting a loan with bad credit or no credit is tough but not impossible — if you take the steps to improve your credit and know which loans to apply for. Loans for people with bad credit are possible but require some smart strategy to pull off. Read on to find out how to get a loan with bad credit or no credit.
If you’re trying to get a loan with bad credit or no credit, you’re going to have to make some compromises. This can include having to go to a non-traditional lender, taking on an expensive interest rate and putting up some form of collateral, to name a few. However, if at the end of the day you need the money, then these compromises may be worth it.
The first place to start, before looking for loans, is to find out what your credit score is. Besides knowing your credit score, you also need to understand credit score ranges. Your credit score falls into a set of FICO credit score ranges that credit bureaus use to determine your creditworthiness. These FICO credit score ranges run from 300 to 850, with the credit ratings broken down as follows:
- Poor Credit: 300-579
- Fair Credit: 580-669
- Good Credit: 670-739
- Very Good Credit: 740-799
- Exceptional Credit: 800-850
If your credit score puts you in the poor credit range, then you should definitely look into bad credit loans. If you fall in the fair credit range, you may still have a tough time with traditional lenders, so it’s a good idea to explore non-traditional options. Meanwhile, if upon investigating you find out you have no credit or a minimal credit profile, then you’ll need to seek alternative loan options as well.
If you’ve checked your credit score and fall in the poor to fair range, or have no credit profile, then it’s time to look at your financing options. Here’s a look at where to get a loan with bad credit and some of the types of loans.
A car title loan is a short-term loan that uses the borrower’s car to serve as collateral against the debt. Title loans are a common option for people who do not qualify for other financing options. The process for getting a car title loan involves paperwork like any other loan application, but since the collateral is based on your vehicle, the lender needs to verify the condition of your car. This is part of the reason why online car title loans are less common and why many car title loan lenders have physical storefronts.
Once you’ve completed the paperwork and the lender has verified your car’s condition, the lender keeps the title to your vehicle, places a lien on it and then gives you the money. It is important to note that you almost always need to own the vehicle outright and cannot have any existing liens against the title. For instance, when you get an auto loan, a lien is created, which gives the lender the legal right to possession of the vehicle until you pay off the loan; this is why it’s called repossession, because the auto lender in essence already possesses the vehicle when you still owe money on it. The lender will also ask for current vehicle registration, proof of insurance, recent pay stubs, a government-issued ID and a utility bill or other proof of residency that both match the name on the title.
With car title loans, you can have bad credit or no credit and still get them. It’s actually pretty common for auto title lenders to not even check your credit all. The reason for this is that the loan is based entirely on the resale value of your vehicle, the collateral for the loan. Additionally, you don’t necessarily need to be employed to qualify for a title loan, though is depends on the lender.
As is common for other types of loans for people with bad credit, car title loans are expensive in terms of rates and fees. According to CreditKarma, it is common to have a car title loan annual percentage rate (APR) of around 300%. This works out to an average of 25% in interest charges per month. Since car title loans are short-term, typically between 15 and 30 days, that monthly interest rate is very important and adds up quickly. If you borrow $500 with a monthly interest rate of 25%, you’d owe $625 at the end of 30 days.
Car title loans should not be a first option. Besides the fact that these loans are expensive, they can be risky. It is not uncommon for borrowers to get stuck in a cycle of debt. If you can’t repay the amount of the loan plus fees, the car title lender often offers you a rollover loan, in which the original amount you owe is rolled into a new loan with additional interest and fees. What’s more, if you can’t make the full repayment for a car title loan, you’re at risk of losing your car. This is because when you handed the title over, the lender put a lien on your vehicle, which means they can take it if full payment isn’t made.
A payday loan is a short-term loan that’s usually for a small amount, typically $100 to $1,000, and is due upon your next payday. Traditionally, the way you took out a payday loan was by writing a postdated check made out to the lender for the full amount of the loan plus fees. You can still do that, but nowadays, you can just authorize the lender to electronically debit your bank account. The lender will then usually give you cash. Payday loans may often be called cash advance loans, check advance loans, postdated check loans or deferred deposit loans.
Since a payday loan is usually due by your next payday, the terms for these loans are generally two to four weeks. If you do not or cannot repay the loan plus any fees by the due date, the payday lender can cash the check you wrote or electronically debit your account for the amount owed.
Payday loans are totally based on your wages and the expectation of receiving them in the near future. Hence, payday loans are not based on credit, so these are common options for people with bad credit or no credit. Unfortunately, like car title loans, payday loans carry significant risks. Payday loans are notorious for their high interest, which average around 400% APR. Since payday loans are based on paycheck cycles, the terms are very short, requiring you to pay off the loan within two to four weeks. Lastly, payday loans often come with additional fees beyond the interest charges and the loan origination fee, such as late fees, return-payment fees, nonsufficient funds charge if your bank account balance isn’t enough to cover the payment and rollover fees if you need to push the due date back and re-borrow. You may be able to get a payday loan with bad or no credit, but it will cost you.
Buy-here, pay-here loans are a type of loan from some auto dealerships that offers no credit check requirement. The interest rates on these types of loans, not surprisingly, tend to be significantly higher than those offered by other lenders. Another catch with these types of loans is that the dealership may require you to borrow more than the value of the car, which means you’ll overpay. With their high interest rates and fees, these types of loans should be used only if you’ve really run out of options.
Payday alternative loans usually have much lower fees and better interest rates than traditional payday loans. The catch here is that these types of loans are only offered by some federal credit unions. To get loans from a credit union, you need to be member, which typically involves a donation or some kind of affiliation through employment, military service or being a family member of someone who works or serves in qualifying fields. Federal credit unions have standards and requirements for payday alternative loans, such as restrictions on the terms, loan amounts and interest rates. For instance, traditional payday alternative loans cannot have an APR higher than 28%, must have terms of one to six months and loan amounts between $200 and $1,000. Federal credit unions have introduced a second, newer version of payday alternative loans with the same interest rate cap, but with terms of one to 12 months and amounts as high as $2,000, according to CreditKarma.
Considering the risks and costs involved in payday loans and car title loans, you’ll only want to turn to those as a last resort. If you’re wondering how to get a personal loan with bad credit or no credit that’s not as risky or short-term, there are alternative lenders who offer no-credit-check personal loans. Many of these types of lenders are online and you can find some good deals. There are online lenders that offer loans with longer terms, lower rates and higher principals than payday loans or car title loans with no credit check required. Instead, the loan is based on your employment status, income, bank accounts and financial history. Without being based on credit or collateral, these loans are expensive. However, that’s a characteristic of basically all bad-credit and no-credit-check loans, not to mention there are online lenders that offer APRs of 99% to 199%, which is better than payday loans or car title loans but still extremely expensive.
Business owners who have bad credit or a thin credit profile do have some loan options. The key criteria to these financing options is that your business needs to be currently operating and generating revenue. The ability to continue operations and bring in money is what lenders are looking for most in these types of business loans, rather than your credit profile.
Here’s a look at some of the more common business loans for people with bad credit or no credit:
A merchant cash advance is a good way to get almost immediate funding for your business. The way merchant cash advances work depends on your company’s operations, not your credit profile nearly as much if at all. This type of financing depends on your company’s ability to make sales because the money you get advanced is based on your future debit and credit transactions with customers. Merchant cash advance companies will want to see proof of your sales, in the form of receipts, when they’re deciding on whether to extend you funding. If you can show consistent, reliable sales receipts, then getting a merchant cash advance is a solid financing option while having bad credit or no credit. The main drawback to merchant cash advances are the cost and fees, but it’s a very viable method of getting the funding you need quickly.
Getting funding through invoice factoring is an option many business owners turn to as well. With invoice factoring, the factor company essentially gives you a cash advance on your accounts receivable, such as outstanding invoices your business is waiting on to collect. The benefits to this type of financing are that you get the cash you need upfront and the value of your invoices is more important than your credit in the eyes of the factor company. The main drawbacks are that invoice factoring often can be expensive and you actually sell your invoices to the factor company, who then collects them from your customers directly.
The internet has revolutionized both banking and lending, creating whole new industries. One of the most notable is peer-to-peer lending, in which the loan you borrow is funded by various people online, the peer-to-peer network. With peer-to-peer loans, borrowers are matched directly with investors through an online lending platform. The investors that you borrow from get to see and choose exactly which loans they want to fund. Peer-to-peer lenders do usually look at your credit profile, but they also have extensive additional requirements, which actually helps to downplay the importance of your credit score when considering you as a borrower. Interest rates are higher if your credit isn’t great, but they’re not nearly as high as payday loans, car title loans or no-credit-check loans.
If none of the previous options are appealing or possible, there are still more alternatives getting a loan with bad credit or no credit. Here’s a look at additional ways people with bad credit or no credit can find financing.
Some possible sources of funding you should investigate first are your family and friends. Lending between friends and family can sometimes hurt relationships if handled poorly, but if you approach it like a traditional loan from a bank, with paperwork and agreed upon terms in a contract, you can make this work. Treating it too casually can be the source of problems when borrowing from friends or family.
Your friends or family can also provide another solution in the form of co-signing. If you don’t have a credit profile or have bad credit, a co-signer is someone who signs their name along with the yours to the loan application and becomes liable for ensuring the loan is repaid. Co-signers generally have established credit, better than the borrower, which why the lenders are willing to make these types of loans since the co-signer takes on risk. Of course, if the borrower isn’t responsible with repaying their loan, the co-signer’s credit will take a negative hit, which could negatively impact personal relationships.
Secured credit cards are ones that require collateral, usually in the form of a cash deposit, in order to get approved. Many secured credit cards are designed specifically for people with no credit who need to build their credit profile and are called credit builder credit cards. Whether its bad credit or no credit, secured credit cards work because lenders not only require collateral such as a deposit, they make the credit limit equal to your cash deposit. This way the lenders have most removed the risk of lending to someone with bad credit or no credit.
Related: The Best Cash-Back Credit Cards
A credit-builder loan is an especially good option for people with no credit and need to build their credit profile. These types of loans tend to come from smaller financial institutions. The way credit-builder loans work is actually sort of like a loan in reverse. When you get a credit-builder loan, the lender deposits the agreed-upon loan amount into a bank account they control. You pay monthly principal and interest payments, which are reported to credit bureaus, but you actually don’t receive any of the funds until you pay off the loan. Once you do that, the lender gives you the funds from the bank account it set up. Since all your payments were reported to credit bureaus, you’ve now established a credit profile.
Though it’s certainly a difficult uphill battle, it is possible for people with bad credit or no credit to get loans for the money they need. If you have poor or no credit, an overall tip to increase your chances of getting a loan is to find secured loans. Secured loans are backed up by collateral, typically a cash deposit or down payment, which then reduces much of the risk for the lender. With the borrower’s risk is reduced, lenders can then extend loans to customers with bad credit or no credit. Unsecured loans and unsecured credit cards, which are not backed up by any collateral, are naturally more difficult to get if you have no credit or bad credit. In the end, there are several viable financing options and alternatives to help borrowers with credit issues get the funding they need.
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