For borrowers brand new to credit, it’s harder to borrow money. As a snapshot of your credit history, your credit score is the main metric lenders use to predict whether you are financially responsible enough to pay off a loan.
Aside from getting payday loans — extortionate high-interest loans that are easy to get but should be avoided at all costs — what are your borrowing options?
What you need to know before taking out a loan
There are other factors that lenders may look at to prove your creditworthiness, such as your debt-to-income ratio, employment history, and bank account balance. The student-friendly Upstart lender even looks at your GPA.
A reliable lender will need proof of your ability to pay, even if it’s not a credit check. Be wary of lenders who do not require any information; they may hope that you will continue to borrow money to pay off your debts.
In addition to checking your lender, you need to evaluate your own ability to handle credit. Figure out how much the loan will cost you over time (don’t forget the interest and fees!) and how you’re going to make payments.
Read more: What you need to know before taking out a loan
If you’ve done your due diligence and are ready to apply for a loan, here are eight ways to get one when you don’t have a credit score.
1. Join a credit union
Unlike most banks, credit unions have a non-profit structure. Their goal is to support and educate their members. They are more likely to work with non-traditional borrowers and give you decent interest rates.
Alternative Payday Loans (PAL) from Credit Unions
Alternative Payday Loans (PALs) are available to individuals who have been members of a federal credit union for at least one month, so they are worth considering even if you are not currently a member.
The credit union can learn more about your financial habits by seeing how you manage the money in your account.
Like payday loans, PALs are usually short-term, one to six months, and have a small amount, typically $200 to $1,000. In 2019, the National Credit Union Administration (NCUA) introduced a second type of alternative payday loan called PALs II, which extends available terms to one year and loan amounts to $2,000.
However, while interest rates on payday loans can reach 400% or more, PAL interest rates are capped at 28%. And PALs limit the amount of credit you can take out at one time, so you don’t run the risk of “rolling over,” a payday loan method where you pay additional fees to extend the loan’s repayment period.
Read more: Credit unions vs. banks
2. Get a loan builder loan
Credit builder loans are for borrowers with no credit history. Because of the way loans are organized, you won’t get the money right away, but you will quickly build credit.
Before you receive the loan amount—usually $300 to $1,000—you make small installment payments over several months. This will help you build a solid payment history. After you have completed the installment plan, you can get a full loan.
Here is more about credit builder loans.
3. Get a secured personal loan
Unsecured loans rely on a person’s creditworthiness to determine eligibility, but secured loans use your assets as collateral.
Assets include anything you own that is of significant value, such as a vehicle, mortgage, savings accounts, stocks and bonds, or insurance policies.
Secured loans can be risky – if you don’t repay the loan, you will lose the asset. But they usually come with lower interest rates and larger loan amounts than unsecured loans.
Secured loans are often available through banks, credit unions and online lenders. To compare offers from multiple lenders in one place, use aggregators like Fiona. They work with some of the leading lenders to provide you with the best loan terms.
Read more: Best Personal Loans for Bad Credit
4. Borrow from your 401(k)
Another alternative to risky loans without credit checks could be your retirement savings.
This option will not affect your credit in any way because you are essentially borrowing from yourself. You can get up to $50,000 from your retirement savings, and you usually have five years to pay that amount off.
However, there are certain risks associated with 401(k) loans, including a 10% penalty for borrowers who miss payments. Also, since repayments are usually taken from your salary, if the borrower leaves, the provider can demand full repayment of the loan in as little as 90 days.
Generally, 401(k) loans are only worthwhile when you need to finance a large purchase, such as a house or car. Some people may be better off temporarily suspending contributions or trying to withdraw funds in difficult circumstances instead.
Connected: How to Get a 401(k) Loan and Why You Shouldn’t
5. Request the help of a guarantor
When a lender offers cash to a borrower without credit, they are taking on a lot of risk; however, if you have a family member or friend who has a good credit history and trusts you, they may become your loan guarantor.
A guarantor can reduce some of the risks for the lender and can also help the borrower get better terms. Every timely payment helps improve your credit history.
On the other hand, if you miss a payment or your loan becomes delinquent, your guarantor’s credit will be severely damaged. This type of arrangement can be detrimental both financially and in relationships, so be sure to consider the stakes before moving forward.
Connected: What does it really mean to be a co-borrower?
6. Become an authorized user of someone else’s credit card
Another way to start accumulating credit is to become an authorized user of another cardholder’s account. Make sure the primary cardholder has a history of timely payments and doesn’t tend to have a large card balance.
As an authorized user, you are essentially sharing a loan with another person and gaining access to their line of credit. You can get your own card and every payment you make will improve your score.
However, you will also share the penalties; if, for example, you make a late payment, the primary cardholder is liable for any accrued interest and their credit history will be damaged in the process.
Before submitting a request to add another cardholder to your account, review and discuss any potential areas of conflict. Also, make sure that the card issuer communicates authorized user activity to all three major credit bureaus. If they don’t, your credit will not be affected.
Connected: Can being an authorized user of someone else’s credit card help you get a loan?
7. Use salary advances
Some employers (not all) offer payroll advance programs through third party lenders. You get credit when you need it and the amount is deducted from future paychecks – no interest or credit check required.
Applications for early payroll
There are many apps these days, like Earnin, that let you borrow money from your future paycheck in the form of an interest-free and free loan. If you get paid through direct deposit and have a stable income with a regular schedule, this might be a good option.
Read more: Earnin app overview
8. Get a secure credit card
Secured credit cards are an excellent means of building credit for those with poor grades and no credit history at all.
Like secured loans, secured credit cards rely on some form of “collateral” to reduce risk. Users are required to pay some cash upfront in the form of a refundable deposit. If you repeatedly miss payments, the lender withdraws from the deposit to make up for the missing funds.
You can only make payments up to the amount of your deposit. Other than that, secured credit cards work just like any other credit cards.
Here is our list of the best secured credit cards.
Summary
If you are borrowing money, make sure you have a solid repayment plan in place before you build credit. Making payments on time (and eventually paying off your loan) can go a long way in boosting your credit score.
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