When you are still building up your credit history or have not yet had time to build a credit history, loans can be difficult to obtain. For years, lenders have relied on credit score as the most important factor in determining which borrowers are worth the credit risk. If loans for bad credit were available, they offered exorbitant interest rates and inflexible terms.
However, this trend is changing; More and more lenders are using alternative credit data or even providing loans without a credit check.
What is Alternative Credit Data?
Ignoring your credit score, how do lenders judge whether you can repay a loan? They use so-called “alternative credit data”.
The factors that typically go into a FICO score or lending decision are known as “traditional credit data”. Traditional credit data includes financial factors associated with loans and borrowings, such as:
- Using a credit card
- History of loans and loan repayments (mortgages, student loans, car loans, etc.)
- Length of credit history
- The amount you owe
- Bankruptcy certificates, if any
Someone who has never taken out a credit card or mortgage, or who has had trouble paying off past debts for whatever reason, may be out of luck.
Read more: How Credit Works: Understanding the Credit Reporting System
Lending companies are beginning to realize how many consumers are left out of traditional credit data, and they are using alternative credit data to supplement or even replace the old metrics.
Alternative credit data can include any financial data outside of the traditional credit reporting system as long as it gives an accurate picture of someone’s financial behavior and reliability. For example, lenders who do not provide loans without a credit check may look at:
- Rental payments
- Communal payments
- Insurance payments
- Mobile payments
- Bank account history (account duration, savings amounts, deposits and withdrawals, etc.)
- Cash flow in a bank account
- Employment history
- The value of property and assets
- Other data such as government documents and educational history.
Many banks already consider alternative credit data when making decisions. They can use a process called “cash flow underwriting” which takes into account customers’ bank account balance and their history of recurring payments such as rent and utilities.
This method can be very beneficial for tenants. Traditional FICO scores give homeowners an edge if they pay their mortgages on time and in full, and responsible tenants can now enjoy similar credit benefits.
Wider creditworthiness data also opens up access to credit for consumers who are “invisible to credit”. You are considered creditworthy invisible if there is not enough credit history on your file to calculate a score. If this applies to you, you are in good company with approximately 26 million other Americans (or one in 10 American adults).
Read more: What does it mean to be credit invisible?
Limitations of Traditional Credit Scoring Models
The rise of alternative credit data is a step towards equity in lending. Traditional lending models tend to favor people who own homes or have high incomes, two accomplishments facilitated by hereditary wealth. Home ownership itself can be a source of wealth.
But many people have been excluded from home ownership for various reasons. One of the main reasons is racial discrimination. The longstanding practice of “redlining” — a policy that discriminates against people in certain geographies, usually black Americans, in mortgage lending — has affected many black borrowers’ access to wealth-accumulating tools. And black and Hispanic consumers are disproportionately likely to be held accountable for debt collection.
When lenders look at a broader range of credit data, such as mobile phone rent and payments, they make it easier to lend to consumers across demographics, from black and Hispanic borrowers to low-income borrowers.
Read more: What is redlining?
Best loans using alternative credit data
The lenders on our list look at the broader financial profile of potential borrowers, from rent payments to employment and more. While some of these lenders still do credit checks, a poor credit score or even a blank credit history will not automatically disqualify you.
OppLoans: the best option for small loans
- Requirements: OppLoans doesn’t have many solid eligibility requirements, but they do check things like your income, bank account cash flow, and employment status.
- Loan amounts: from 500 to 4000 dollars.
- Repayment terms: from 9 to 18 months.
- Annual interest rates: 160% max.
For credit-invisible borrowers who need small loans, OppLoans might be worth considering. OppLoans has partnered with a credit bureau that does not use traditional credit scores at all in its credit histories. Their loans are unsecured, which means you don’t need to post any collateral to borrow. Approved borrowers can receive funds as early as the next business day.
Visit OppLoans or read our full review.
Upstart: Best for fast approval
- Requirements: If you have a permanent job or a permanent part-time job, you can apply. Upstart accepts candidates without sufficient credit history for evaluation. If you have a credit score, it must be at least 300 (this is a very low score).
- Loan amounts: from 1,000 to 50,000 dollars.
- Repayment terms: 3 or 5 years.
- Annual interest rates: from 5.6% to 35.99%; the average five-year loan per annum is 25.05%.
Upstart is a great option for recent graduates who have a job but bad credit. Their credit model takes into account employment, education, and debt-to-income ratio. They can usually send funds within one business day of approval, and they don’t have a prepayment penalty if you pay off your loans early.
Visit Upstart or read our full review.
Earnings: the best without interest and commissions
- Requirements: Earnin users need regular payout schedules, a direct deposit into their checking account, and some sort of time tracking system.
- Loan amounts: Up to $100 per day or $500 per pay period.
- Annual interest rates: No interest or fees – instead tip as much as you think is fair.
Earnin works a little differently than other lenders; it offers loans by giving you an advance on your next paycheck. Connect your bank account and payment schedule information, and Earnin will allocate money from your future paycheck to you, providing you with a loan without a credit check.
Visit Earnin or read our full review.
Oportun: Best for getting a loan
- Requirements: Proof of income and up to four personal recommendations.
- Loan amounts: from 300 to 20,000 dollars.
- Repayment terms: from 12 to 48 months.
- Annual interest rates: Up to 35.99%.
Oportun offers both unsecured and secured personal loans. With secured loans, you offer assets as collateral (such as a car) in exchange for better terms and a lower interest rate. Although Oportun reviews your credit, they consider alternative credit data and do not have a minimum credit score. In addition, they pass on your payment information to credit bureaus to help you secure a loan for the future.
Visit Oportun.
credit point: Best repayment terms
- Requirements: Minimum annual income of $35,000 and a personal bank account.
- Loan amounts: from 2,000 to 36,500 dollars.
- Repayment terms: 24-72 months.
- Annual interest rates: from 7.99% to 35.99%.
LendingPoint Loans for Bad Credit go beyond your credit history with a data-driven funding model that takes into account factors such as your debt-to-income and payment-to-income ratios. There are no minimum credit rating requirements.
Visit LendingPoint.
Svaya: the best choice for undocumented borrowers
- Requirements: US bank account and legal visa for at least six months.
- Loan amounts: from 6 to 36 months.
- Repayment terms: from 1,000 to 35,000 dollars.
- Annual interest rates: 7.99% to 35.99%.
Stilt offers bad credit loans – they will check your creditworthiness if you have a credit history, but there is no minimum score required. Their focus is on lending to borrowers with no credit history in the United States, including undocumented borrowers. Unlike almost all other lenders in the US, they do not require a Social Security number. Instead, Stilt’s credit model takes into account your education, work experience, and spending behavior.
Visit Stilt.
Why not get a payday loan?
People seeking loans without a credit check may be tempted by payday loan offers that seem to guarantee funding to anyone through a simple approval process. But if payday loans sound too good to be true, it’s because they are. Regardless of which payday lender you choose, the disadvantages outweigh the benefits, including:
- Expenses. Payday loans almost always cost the borrower more in the long run. Their annual interest rates are usually in the triple digits, around 400% or higher.
- A small amount. Many payday loans are limited to less than $500. If this amount is all you need, it’s best to find a legitimate lender and avoid sky-high APRs.
- Short repayment periods. Your payday loan usually has a maturity of one to four weeks. Many lenders are counting on you not being able to repay by then, so they will let you extend or “roll over” your loan at higher interest rates.
Read more: What is a payday loan and why is it really a bad idea?
Summary
One of the benefits of loans without a credit check is that they are based on your current financial behavior such as rent, employment, and responsible spending, rather than financial decisions you may have made in the past.
As more lenders gain access to alternative credit data, there may be even more competitive loans without credit checks or bad credit loans from vendors in the future. At the same time, people with thin or patchy credit history have plenty of options to borrow money.
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