For borrowers brand-new to credit, it’s harder to borrow money. As a snapshot of your credit history, a credit score is the main metric lenders use to predict whether you’re financially responsible enough to repay a loan.
Aside from taking out payday loans — high-interest, predatory loans that are easy to get but should be avoided at all costs — what are your borrowing options?
What to know before you borrow
There are other factors lenders can look at to prove your creditworthiness, like your debt-to-income ratio, employment history, and bank account balance. Student-friendly lender Upstart even looks at your grade point average.
A trustworthy lender will need some proof of your ability to repay, even if it’s not a credit check. Be wary of lenders who don’t require any information; they may be hoping you keep borrowing money to pay off your debts.
Aside from vetting your lender, you need to estimate your own ability to handle credit. Figure out how much the loan will cost you over time (don’t forget interest and fees!) and how you’re going to make the payments.
Read more: Things to know before you take 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 have no credit score.
1. Join a credit union
Unlike most banks, credit unions are structured as nonprofits. Their goal is to support and educate their members. They’re more likely to work with nontraditional borrowers, and to give you decent interest rates.
Payday alternative loans (PALs) from credit unions
Payday alternative loans (PALs) are available for individuals who have been a member of a federal credit union for at least one month, so they may be worth considering even if you are not currently a member.
The credit union can learn more about your financial habits by seeing how you handle the money in your account.
Like payday loans, PALs are generally short-term, one to six months, and small-dollar, typically between $200 and $1,000. In 2019, the National Credit Union Administration (NCUA) introduced a second type of payday alternative loans, called PALs II, which extends available terms up to one year and loan amounts up to $2,000.
However, while interest rates on payday loans can soar up to 400% or more, PAL interest rates are capped at 28%. And PALs limit the amount of loans you can take out at one time, so you don’t risk a “rollover” — a payday loan technique where you pay extra fees to extend a loan’s due date.
Read more: Credit unions vs. banks
2. Get a credit builder loan
Credit builder loans are designed for borrowers without a credit history. Because of the way the loans are set up, you won’t get money right away, but you’ll build credit quickly.
Before you get the loan amount — typically between $300 and $1,000 — you make small installment payments over several months. This helps you establish a solid payment history. Once you’ve finished the installments, you can access the full loan.
3. Get a secured personal loan
Unsecured loans rely on an individual’s creditworthiness to determine eligibility, but secured loans use your assets as collateral.
Assets include anything you own of significant value, like a vehicle, a mortgage, savings accounts, stocks and bonds, or insurance policies.
Secured loans can be risky — if you don’t repay the loan, you’ll lose the asset. But they usually come with lower interest rates and larger borrowing amounts than unsecured loans.
Secured loans are often available through banks, credit unions, and online lenders. To compare offers from multiple lenders in one location, take advantage of aggregators like Fiona. They work with some of the leading loan providers to get you the best loan terms possible.
Read more: Best personal loans for bad credit
4. Borrow from your 401(k)
Another alternative to dangerous no-credit-check loans may be via your retirement savings.
With this option, there is no effect on your credit because you’re essentially borrowing from yourself. You can pull as much as $50,000 from your retirement savings and typically have five years to repay the amount.
However, there are certain risks affiliated with 401(k) loans, including a 10% default penalty for borrowers who miss payments. Furthermore, since repayments are typically pulled from your paycheck, if a borrower’s employment is terminated, a provider can require full repayment on the loan in just 90 days.
In general, 401(k) loans are only viable when you need to finance a large purchase, such as a home or vehicle. Some individuals may be better off temporarily pausing contributions or seeking a hardship withdrawal instead.
5. Request the help of a cosigner
When a lender offers cash to a borrower with no credit, they accept a great deal of risk; however, if you have a family member or friend who has good credit and trusts you, they could become a cosigner on your loan.
A cosigner can mitigate some risk for the lender and may also help the borrower obtain more favorable terms. Each on-time payment helps boost your credit history.
On the other hand, if you miss a payment or your loan becomes delinquent, your cosigner’s credit would be seriously damaged. This type of arrangement can be harmful financially as well as relationally, so be sure to consider the stakes before you move forward.
Related: What does being a cosigner really mean?
Another way to begin building credit is to become an authorized user on another cardholder’s account. Make sure the primary cardholder has a history of timely payments and doesn’t tend to carry a large card balance.
As an authorized user, you essentially share credit with another individual and receive access to their line of credit. You may get your own card, and each payment you make improves your score.
However, you’ll also share penalties; if, for instance, you make a late payment, the main cardholder is responsible for any interest charges incurred and their credit history will be damaged in the process.
Before you request to be added to another cardholder’s account, consider and discuss any potential areas of conflict. Furthermore, be sure to confirm that the card issuer reports authorized user activity to all three of the major credit bureaus. If they don’t, your credit won’t be affected.
7. Make use of paycheck advances
Some employers (not all) offer paycheck advance programs run through third-party lenders. You get a loan when you need it, and the amount is deducted from future paychecks — no interest and no credit check required.
Early wage deposit apps
These days there are plenty of apps, like Earnin, that let you borrow money from a future paycheck as an interest-free, fee-free loan. If you’re paid via direct deposit and have a stable income with a regular schedule, this could be a good option.
Read more: Earnin App review
8. Get a secured credit card
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 security deposit. If you repeatedly miss payments, the lender pulls from the deposit to make up the missing funds.
You can only make charges up to the amount of your deposit. Other than that, secured credit cards work just like any other credit card.
If you do borrow money before you build credit, make sure you have a solid repayment plan. On-time installments (and eventually a paid-off loan) can go a long way toward boosting your credit score.
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