Can you get a loan with no credit history?

29 October 2020
Not having a credit history can potentially make getting a loan difficult, but it’s not necessarily a roadblock in all cases.

It’s possible to reach a point in your life where you want a home loan, car loan or personal loan, but don’t have a credit history. This could be the case if you:

  • haven’t previously held any loans or lines of credit
  • haven’t ever had a postpaid phone plan (as opposed to a prepaid phone plan) or an account with a utility provider (e.g. gas, electricity, water)
  • haven’t applied for credit in a while (credit enquiries are removed from your credit report after five years)
  • have recently moved from overseas

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Banks and other financial institutions typically check your credit history and credit score when you apply for credit, to find out if lending money to you is a smart move. If you don’t have a credit history, it can be harder for a bank to assess how risky you may be as a borrower. While it may still be possible to get a loan, there are some risks associated with this. This means it could be worth trying to build up a positive credit history before applying for a loan.

There are a handful of ways you could improve your chances of being approved for a loan with no credit history. This may be of particular interest for you if you are a first home buyer. If you have a bad credit history rather than no credit history, your situation may require different strategies.

Why is having a credit history beneficial when applying for a loan?

When you apply for a loan, your lender will typically use your credit history to assess how much of a financial risk it is to lend you money, based on factors such as:

  • What types of credit or loans you have taken out in the past (including any loans or credit cards you still have) and how much you borrowed
  • Whether you’ve made all your regular repayments on time

Generally speaking, the better your credit history, the less of a borrowing risk you are seen to be – and vice versa.

In the eyes of many lenders, not having a credit history may be a red flag, and they may not be confident about the idea of lending you money as a result.

This could mean a lender either charges you a higher interest rate, or rejects your application outright. And of course, you may not want a loan rejection as the first entry on your credit history report.

While loans that don’t require a credit check do exist, they’re generally more expensive and riskier than those that do require a credit check. They may also come with stricter application criteria. If you do have a poor credit score, you should consider the merits and drawbacks of such options very carefully, and assess any fees, interest rates, contract terms and risks that might apply as part of your decision-making. You may also want to consider seeking professional financial advice. If you need it, free financial counselling is available.

How do I start to build up my credit history?

To start building a positive credit history, you could try strategies such as:

The above steps could help to build your credit history; however, you will need to be careful to meet all of your repayments in a timely manner with no defaults or missed payments in order to build a good credit history. You might want to do up a budget or schedule automatic payments to help with this.

Another option is to take out a form of credit, such as a credit card, in order to start building up your credit record. However, you should be cautious about doing this and it’s not something you need to do to establish your credit history. Although a credit card (or other credit product) can help you to establish a consistent repayment history and may help to build your credit score, it’s important to consider the potential risks involved. For example, it can be easy to accumulate a large amount of debt on a credit card over time, and your credit score could actually be negatively affected if you were to miss repayments. Credit cards can also be expensive, particularly if you don’t pay your balance in full at the end of each statement period and end up being charged interest on top of any fees that apply.

Will it take time to build up my credit history?

Yes, it takes time to build up your credit history. If you want to take out a loan, ask yourself whether you could afford to wait a few years. It could improve your likelihood of being approved for a loan if you consider putting the brakes on your application plans and instead spend some time building a positive credit history. It may also help you get a more favourable interest rate.

How can I show I’m a relatively safe lending risk without a credit history?

If you don’t have a credit history but decide to apply for a loan anyway, it may help if you can demonstrate how you’ll be able to repay the loan in some other ways. Lenders may consider you a safer lending risk if you can show evidence of the following:

  • A full-time, secure job with regular income, and a stable living arrangement
  • A high enough income to comfortably make the repayments on the loan, without ending up in mortgage stress or financial difficulty in repaying another type of loan
  • No history of dishonour fees, late payments on bills, or failed payments using your debit card
  • A consistent and disciplined saving habit

You can use our Mortgage Repayments Calculator or Personal Loan Repayments Calculator to give you an idea of what the repayments would be on the type and size of loan you’re considering applying for.

Keep in mind that when it comes to home loans specifically, the size of your deposit and the loan-to-value ratio (LVR) of your desired loan may influence your likelihood of being approved. This is because certain providers may refuse your loan application or charge additional costs (such as lenders mortgage insurance) if your deposit doesn’t make up at least 20% of the purchase value of the property you’re hoping to buy. First home buyers may also want to look into the government’s First Home Loan Deposit Scheme (FHLDS). Under this scheme, some first home buyers can buy a home with just a 5% deposit. There is also the First Home Super Saver Scheme (FHSSS, or FHSS), which enables saving money in your super towards a first home.

Would a secured or unsecured loan be preferable if I don’t have any credit history?

The type of loan that is right for you will depend on your personal needs and circumstances. It may not even be a good time for you to apply for a loan at all, depending on your budget and requirements.

If you don’t have a credit history and want to apply for a personal loan, you might want to consider what assets you own that you could offer as security for the loan. This mainly applies to personal loans, because a home loan or car loan is usually secured by the home or car you are buying.

Secured loans generally represent less of a risk for lenders than unsecured loans. Canstar research shows that interest rates are generally lower for secured loans. However, secured loans also come with the risk that the lender could repossess the asset used as security if you are unable to meet your repayments.

Bear in mind that the interest rate you are charged may depend on the specifics of your application, and could be higher than the rate a borrower with a good credit history might be charged, regardless of whether the loan is secured or unsecured.

As we’ve outlined, it’s not necessarily impossible to get a loan without first having built up a credit history. However, it’s important to remember that some loan types and sizes may still be out of your reach, simply due to the responsible lending standards in place for banks and financial institutions. This means it may be beneficial to apply for a loan type and size that may be more suited to your situation, or wait until you have built up a positive credit history.

If you want to apply for a home loan, and even if you’re a perfect candidate – aside from your lack of a credit history, of course – some lenders may still only offer you a bad credit home loan due to uncertainty about your borrowing risk. Such loans generally come with higher interest rates and, subsequently, higher repayments.

If you do apply for a loan with no credit history, the outcome of your application will mostly depend on your personal finances and circumstances.

This article was reviewed by our Sub Editor Jacqueline Belesky and Finance Editor Sean Callery before it was updated, as part of our fact-checking process.

Main image source: (Shutterstock).

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