Getting a loan at eighteen is often tricky because many young adults do not have a credit history.
Many short-term loans do not need a credit check, but they also do not help you create a history of paying on time that credit bureaus can record.
How do you get your first loan with monthly payments?
Verify your identity to secure your first loan with monthly payments. Provide your name, address, date of birth, and social security number to the credit bureaus. Banks are more willing to lend to individuals with identification details listed on their consumer reports.
Verify Personal Identity
For 18-year-olds without a credit history, the first step is to prove you are who you say you are. When lenders confirm your identity, you move closer to securing your first loan.
While employed at Experian, my research showed that young adults with proven identities are usually less risky. Our rankings always showed this order, from highest to lowest risk:
- No record found is the worst.
- A credit score below 580 is bad.
- A verified identity is fair.
- Credit scores above 640 are better.
Your credit score doesn’t start at age eighteen; it begins once you have a six-month record of payments. Your first loan can start this record. Confirming your identity through multiple sources is the first step in the process.
Secured Credit
Credit builder loans and secured credit cards are viable ways for young adults to establish their identities with credit bureaus. Banks often approve these products because collateral lowers risk.
Credit builder loans and secured credit cards require the applicant to deposit money into a bank account first. For example, if a borrower deposits $500, the bank would grant a credit line of $500.
Choosing this option offers both immediate and delayed rewards:
- Immediate: Your identity gets verified instantly when the bank notifies the three bureaus of your transaction.
- Delayed: You’ll have a valid credit score once six months of payments are reported.
Consider taking out a credit builder loan to begin this process.
Checking Account
Young adults can confirm their identity and set up loan repayments by opening a checking account in their name. While a checking account’s details don’t appear on credit bureau reports, having one can improve your borrowing options.
If you’re looking to build your financial foundation, consider the following:
- Lenders often consult checking account reports from bureaus like ChexSystems to verify identities and ensure applicants have valid, active accounts.
- Lenders typically require a bank account to deposit loan funds and set up automated repayments, so you must provide your account and routing numbers.
To streamline this process and quickly establish a banking relationship, you might want to open a checking account with Chime, which you can do within minutes.
Student Loans
For young adults heading to college or trade school, federal student loans offer a straightforward path to establishing their identity with the reporting bureaus. Eligibility typically requires at least half-time enrollment in a program leading to a degree or certificate.
Complete the Free Application for Federal Student Aid (FAFSA) form using the online web portal. Once approved, the Department of Education reports the student loan transaction to Experian, Equifax, and TransUnion.
When lenders pull a copy of your credit report from the three major bureaus, you have a verified identity from two authoritative sources.
- The Department of Education confirmed your name, address, date of birth, and social security number belong to an actual person.
- Your school validated that the person with the same name, address, date of birth, and social security number enrolled in one of their programs.
Loans With Monthly Payments
Eighteen-year-old adults without a credit history can still secure their first loan with monthly payments by proactively establishing their identities with credit bureaus and ensuring they have verifiable employment with an income that comfortably covers the installments.
These loans offer financial flexibility and help build a credit history with the major consumer reporting agencies Experian, Equifax, and TransUnion.
Personal Loans
Unsecured personal loans, as they don’t require collateral, present a viable borrowing pathway for young adults without a credit history.
Success hinges on having a verified identity, ensuring the monthly payments are manageable, and tapping into online networks of lenders adept at working with first-time borrowers.
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Affordable Payments: Lenders assess affordability by calculating your debt-to-income (DTI) ratio. A lower DTI ratio is favorable for loan approval, and you can achieve this by:
- Borrowing only the amount you need, as smaller loans lead to lower monthly payments.
- Including all income sources in your application, such as any regular financial support you receive from your parents.
Online Network: Many lenders who specialize in working with first-time borrowers are part of online lead networks. By submitting your loan request through these networks, you can efficiently have your profile reviewed by multiple finance companies.
Secured Auto Loans
For 18-year-olds lacking a credit history, secured auto loans with monthly payments can be a practical choice, provided they have established their identities beforehand.
You can increase the likelihood of loan approval by selecting an affordable vehicle, maintaining steady employment, offering a sizable down payment, or securing a co-signer.
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When seeking a secured auto loan, consider these factors to enhance your approval odds and lower the lender’s risk:
- Opt for a dependable used car within your budget to make the loan manageable.
- Secure a well-paying job with verifiable income, demonstrating your capability to make regular payments.
- Offer a down payment of at least 20%, signifying your commitment to the loan and reducing the lender’s financial risk.
- Enlist a co-signer with a more established credit history who agrees to repay the loan if you encounter financial difficulties.
Short-Term Loans
Short-term loans are attractive to 18-year-olds, as they often do not require credit checks, making them accessible regardless of borrowing history.
However, it’s important to note that these loans typically don’t help build a credit profile with the major consumer reporting agencies—Experian, Equifax, and TransUnion—since the lenders usually don’t report the payment activity.
Buy-Now-Pay-Later
Buy-now-pay-later plans let you borrow money for six weeks to buy things from stores and build trust with the lender. Most initial transactions do not require a credit check.
Buy-now-pay-later loans are usually small. They often need a 25% down payment and three more payments every two weeks. Young adults can build trust by borrowing from the lender for several purchases.
Suppose you pay off several purchases on time. In that case, you may become eligible for loans with monthly payments from the same lender. Choose one of these providers:
Payday Loans
Payday loans have short repayment terms of one to two weeks and do not require a credit check. Lenders consider employment status and income when qualifying applicants.
Young adults should consider payday loans for emergency needs only. Instead of interest, payday loans have up to a 20% fee on the amount borrowed. If you don’t pay off the loan with your next paycheck, you’ll face these fees again – making payday loans an expensive way to borrow money.
Apply for payday loans online if they’re legal in your state.
Title Loans
Title loans have short repayment terms measuring in weeks and do not require a credit check. Borrowers use their vehicles as collateral to obtain immediate cash.
Young adults need the car title under their name, not under their parents’. They must also have enough equity in the vehicle. Equity is the car’s resale value minus the amount owed on any car loan.
Use title loans for emergency needs only. Like payday loans, you incur additional origination fees if you don’t pay off the total balance on time. Plus, the lenders could repossess your car if you fall behind on payments.
Apply for title loans if legal in your state.
