Here’s a myth: You need credit to get credit. Despite how often you may have heard this one, the truth is that you don’t always need a credit history to take out a loan or get approved for a credit card. Discover more about the role credit plays when you apply for a loan below and if it’s possible to take out a loan with no credit.
How Can Credit Impact Loan Approval?
Your credit score and credit history can impact your ability to get a loan, but policies vary by lender. It’s up to the lender considering your application to decide how big a role your credit plays when applying, or whether it’s even considered at all.
The reason many — but not all — lenders base loan approval on credit score or credit history is that these factors help the lender make a more educated assessment of the risk you present as a borrower. If your credit history shows that you always or mostly pay your bills on time and that you manage money responsibly, it’s more likely you’ll continue to do so in the future. That can make some lenders more willing to offer you a loan.
Potential lenders that consider your credit history may look at just your credit score or they may consider the entire credit profile.
Lenders that look only at credit scores tend to have policies about what score you need to get approved. If your score doesn’t fall in that range, the lender may not approve you or may only offer you limited products.
Banks and other lenders that look at the entire credit profile typically do consider the credit score. However, a score that falls outside of a set range may not immediately cause you to be denied a loan. The lender might go on to review the details of your credit report to understand why your score is lower than they’d like to see. Depending on what factors are included in that report, they may still offer you a loan.
How Can Credit Impact Loan Cost?
Your credit score and credit history don’t just impact whether you can get a loan or not. It can also impact the cost of your loan. Creditors that check your credit to help decide on loan approval do so to establish an understanding of the risk you present. The higher the risk you present as a borrower, the more likely you are to cost the lender money down the road by missing payments or defaulting on your loan.
Because of this, some lenders charge people with bad credit or no credit a higher interest rate. This ensures the lender recoups more money faster to mitigate the possibility of someone defaulting on the loan later. Higher interest rates mean that your loan costs more over time.
No Credit vs. Bad Credit When Getting a Loan
No credit is different from bad credit. Bad credit means your credit score is low because of negative factors on your credit report, including missed or defaulted payments, collections accounts, foreclosures, too much debt or bankruptcies.
No credit means you haven’t established credit or enough credit. If you’ve never had credit at all, you won’t have a credit profile or score. If you’ve only had one account for a very short period of time, you have a credit profile but there’s typically not enough information in it to provide you with a credit score.
Having no credit might seem like you have a clean slate and creditors would be happy to work with you. However, without a credit history, lenders can’t evaluate the risk of lending to you. On their side, it’s not a positive blank slate. It’s a complete mystery, which means they have to assume the risk is high.
For that reason, having no credit puts you in much the same boat as someone with bad credit. You may not be able to get certain loans or may pay more interest on those loans.
How to Get a Loan With No Credit
However, that doesn’t mean you can’t get a loan with no credit (or bad credit, for that matter). In fact, there’s an entire set of financial products designed to help people build credit by getting loans. They’re sometimes referred to as credit-building loans but other terms include bad credit loans or no credit loans.
Here are some things to consider (and look for) when you’re getting a loan with no credit:
- Look for loans that don’t require good credit or a credit check at all. Applying for loans that you can’t qualify for can leave hard inquiries on your credit profile. Those have a small negative impact on your credit score, so you don’t want to rack up a bunch — especially if you don’t have much credit to begin with. So, do your research before you apply and make sure the loan doesn’t require a credit check or good credit to enhance your chances of approval.
- Remember that you might pay more in interest. A lender willing to take a chance on someone with no credit may charge higher fees or interest. Be aware of this and budget for it, but don’t accept outrageous fees that you can’t afford just to get credit. Shop around to find a responsible lender.
- Choose a lender that reports to the credit bureaus. One of the benefits of getting your first loan is that you can start building credit to make this process easier in the future. But that only works if your lender reports payments to the credit bureaus. Look for a personal loan company that reports to multiple major credit bureaus to maximize this benefit.
Getting a Loan From Wise Loan
Wise Loan offers small personal loans and doesn’t require good credit. Our responsible lending practices help you manage your debt in a positive way and we offer a number of perks for those who pay back their loans as agreed. Wise Loan also reports to two of the three major credit bureaus, which helps you build your credit over time.
Find out more about Wise Loan loans and apply today. It only takes a few minutes to apply online and you can even get instant, same or next-day funding for your loan.