New borrowers often share a similar dilemma when it comes to qualifying for a loan. A first-time loan is vital to establishing a credit history but getting one without a credit score may seem like an impossible task. Although a co-signer is usually helpful, getting a family member or friend to share financial responsibility for your loan is not always easy. But there are other options for getting a first-time loan.
Join a Credit Union
Where you bank can make it easier or more difficult to qualify one your own. According to Debt.org, a nonprofit credit union owned by its members may be more willing to look past your lack of established credit than a for-profit commercial bank. Look for one affiliated with your employer or groups to which you belong as this may also increase your chance of qualifying for a loan.
Apply for a Secured Loan
Although you may not have physical assets with enough value to pledge as collateral, a cash-secured loan is another option. Open a savings account or a certificate of deposit, or pledge money you’ve already saved to act as collateral. The financial institution will freeze either all or the portion of the account you pledged until you repay the loan.
If you get a secured loan, ask for a loan term of at least six months. According to author and financial expert Dave Ramsey, this is the minimum term required to make the loan “scoreable.” To establish a good payment history, don't pay off the loan early. Instead, make your monthly payments on time each month to grow your credit history.
Use Alternative Evidence of On-Time Payments
Some lenders will accept alternate evidence that demonstrates financial responsibility. According to Ramsey, steady employment over the past two years and a solid payment history with regard to monthly expenses such as rent, utilities, telephone and insurance demonstrates your ability to handle money.
Increase Your Down Payment
If you’re looking for a loan to purchase a home or a vehicle, offer at least a 20 percent down payment. Not only does a large down payment reduce the risk potential of the loan, but it may also help you qualify for a lower interest rate.
Monitor your credit history as it starts to grow. The three main reporting agencies -- Equifax, Experian and TransUnion -- provide a free copy of your credit report once every 12 months through AnnualCreditReport.com.
Buy Here, Pay Here Vehicle Financing
Many car dealerships offer in-house financing as an alternative to traditional credit. However, although most offer “guaranteed approval,” they also limit your purchasing options. According to Autotrader.com, most "buy here, pay here" dealers will prequalify you and offer you only select vehicles for which you qualify. However, as an advantage, the repayment period is often shorter than for a traditional car loan.
What About a Home Mortgage?
The Federal Housing Administration -- FHA -- loan program has an option for borrowers with no established credit to purchase a home. You may qualify if you have:
- Two years of steady employment.
- Steady or
- A mortgage payment no greater than 30 percent of your
gross monthly income.
In addition to an FHA loan, state and local housing programs such as NeighborWorks can often help a new borrower qualify to purchase a home without a co-signer.