Can you get a loan without a credit history? Practical options explained

First-time borrowers in the country, such as young professionals, students, or those new to formal finance with no credit history, may find it challenging to secure new personal loans or credit cards. Having no credit history can feel like a dead end.

Still, to combat such a situation, lending institutions now offer several ways to avail credit even without a proper credit score or an elaborate borrowing history.

Start with lender-friendly options

Banking institutions and NBFCs immensely rely on alternative methods to analyse risk, especially for new-to-credit borrowers. Some of these options are briefly discussed below:

1. Secured loans: Loan products backed by gold, fixed deposits, property, or insurance policies are easier to obtain. The reason for the same is the collateral. The pledged collateral reduces the risk for lending institutions and places the primary responsibility of repayment on the borrower.
2. Education and student-linked loans: These loans are specifically designed for aspiring borrowers with no prior credit history, often with a co-applicant such as a close relative, guardian, or parent.
3. Pre-approved offers through salary accounts: If you have a positive relationship with your banking institution and your salary is credited regularly, your banking institution may extend small personal loans to you based on your income stability.

Use a co-applicant or guarantor

When you add someone with a solid credit score and a clean credit profile, this can significantly boost your loan approval chances. Banking institutions want complete clarity and assurance on the funds they lend.

Once they are confident that the loan application is backed by solid collateral or a reputable borrower, the loan is sanctioned. This can be accomplished by:

• Submitting joint applications: A co-borrower who has managed credit effectively in the past or has a long credit history to support their claim can be a reassuring addition to the loan application.
• Apply with guarantors:Some NBFCs and banking institutions also clear personal loan applications if a reputable guarantor agrees to step in if repayment fails. A reputable guarantor can be someone who has a history of consistently paying credit card bills, personal loan EMIs, or home loan EMIs within the stipulated timeframe for years.
• Applying for lower initial amounts: In case you do not have a co-applicant, then you can still try to apply for a modest loan, i.e., a smaller loan amount. This improves approval odds and helps build a repayment history. Such loans are generally approved, provided the borrower meets other essential basic criteria.

Focus must be on building a basic credit footprint first

If immediate borrowing is not essential, first-time borrowers can take small steps to establish a credit profile before applying for larger loans. To accomplish this, you should:

• Start with an overdraft facility: Use basic banking products responsibly, such as overdraft facilities offered by banks. This will help in creating a repayment record.
• Maintain a consistent flow of income: Stable employment for years together and regular income credit proof, strengthens your financial profile, making lenders more confident in your ability to repay.
• Avoid missed payments: Even one delayed payment can negatively impact a new credit profile. Paying all dues on time builds trust with lenders and improves future borrowing terms.

In summary, getting a loan without a credit history is possible, still it comes with several inherent risks and trade-offs. Personal loans offered to new borrowers often carry high interest rates, strict repayment terms, shorter tenures, harsh penalties for missing EMIs, also with the possibility of stern legal action in case the borrower defaults.

That is why one should understand and acknowledge these risks, consult a certified financial advisor, and go ahead with the loan after conducting proper due diligence. A strong credit foundation can only be built if you plan the repayment of any borrowed funds well in advance.

Disclaimer: MintMoney has a tie-up with fintechs for providing credit. You will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards, and credit scores. MintMoney does not promote or encourage taking credit, as it comes with a set of risks, such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.