6 Essential Terms to Know About Loans for Young People with No Credit History

When you’re young, and just starting off in life, the world is full of possibilities. You spend your days imagining what college will be like and if you’ll like your major. You daydream about what it will be like to live in your own place. You imagine the great memories you’ll make with your friends during a trip to Panama City Beach. These are the kinds of things that almost every young person thinks about, but one thing that often isn’t considered is how you’ll find loans for young people with no credit history.

But if you’re a young adult, or you’re the parent of one, this is something you need to start considering now. While we keep hearing on the news about how the economy is better than it has been in years, it only seems to apply to the wealthy. It’s not doing much for the poor and blue-collar workers working over 40 hours a week just to stay in debt.

Despite that, young adults will still need access to money to get started in their newfound adulthood. They need to buy furniture, gas, groceries, and other basic essentials. Due to the current economy, parents often can’t help as much as they would like. That’s why it’s essential that you understand how loans work, and how you can qualify.

The best place to start is with common terms that you’re going to find throughout the lending industry. These terms will mean the same thing no matter which lender you work with. You will encounter them at some point in your search, so it’s crucial that you know them beforehand. In this post, we’ll cover six of the most commonly used terms, and explain how they relate to people with no credit history.

Credit HistoryNo Credit History

Since it’s in the title, and probably the reason you’re reading this post, we’ll start with credit history.

Credit history is the cumulative record of the accounts you’ve had, the amounts of credit you’ve had access to, the payments you have made (or failed to make), and the length of time you’ve had access to different lines of credit. Often, your credit history is communicated via a credit score. Your credit score represents the perceived risk you pose to any potential lenders.

Credit history is crucial to qualify for most loans because it gives lenders a general idea of how you behave with money. Good credit histories indicate that you are responsible. Generally, a good credit history shows that a person has paid their bills on time, only spent what they could afford, and hasn’t relied on credit for the majority of their expenses. The converse is true for poor credit histories.

When you don’t have a credit history, you’re an unknown variable. You could very well be a responsible person who can handle a loan just fine, but there’s no easy way to prove it.

Capacity

A person’s capacity is their ability to repay the money they borrow. It’s based primarily on two factors: income and DTI.

Your DTI, or debt-to-income ratio, is a calculation of how much money you make versus how much you’re obligated to spend. An example would be a person who makes $30,000 per year with $10,000 in annual debts. Their DTI would be roughly 33%.

In most cases, lenders will only work with people whose DTI is not greater than 35 to 43%. This is because they want to know that if you have an emergency, or have to spend more than normal, you can still afford to repay your loan.

While income and DTI are the two primary factors that makeup capacity, your personal assets also play a potential role. In lending terms, these can contribute to your capacity in the form of collateral.

For people with no or little credit experience, a high capacity can offset their perceived risk, and persuade a lender to work with them.

Collateral

Collateral refers to any assets that you promise to give the lender if you default on your loan. In this case, the lender would seize your property and then sell it to finish paying off your loan. The most common forms of collateral are homes and vehicles, but can also include things like jewelry, expensive paintings, stocks, and savings bonds.

The use of collateral can be very tempting for young people seeking for a loan. Often, lenders are more than willing to work with someone who provides collateral. It’s a guaranteed return on their investment if the borrower defaults.

While collateral can definitely help you qualify for a loan you otherwise couldn’t, the risks are obvious. Young people, in particular, don’t have many assets that they truly own. If you were to lose your car because you default, you’d be in a worse spot than if you’d never taken out a loan. For this reason, secured loans, in general, are best avoided.

Secured Loans

Secured loans are defined as transactions where collateral is used to ensure the lender will get a return on their investment. Every type of secured loans uses some type of collateral. For example, mortgage loans use the house you’re purchasing, while auto loans use the car you buy. Other secured loans don’t require a material asset but do require a down payment.

Because they’re easier to get than many other loans, secured loans often appeal to first-time loan seekers without credit. However, as was stated before, they carry much more risk for the borrower than the lender.

Unsecured Loans

Unsecured loans are the exact opposite of secured loans. They require no form of collateral to receive, and the only actions a lender can take if you default on your loan is to send your bill to a debt collection agency or take you to court. While unsecured lenders can charge late fees if you’re behind on payments, they can never seize your property without a legal order.

Unsecured loans are by far the safest option for young adults without credit to get a loan. Though they can be more difficult to qualify for, there’s no risk that you will lose your house, car, or any other possessions. There are many options to a get a quality unsecured loan with no credit, and these are by far the best way to get money and start establishing your credit history.

Principal

Often confusing for first-time borrowers, the loan principal may refer to two different amounts in regards to your loan. The first instance refers to the amount that you originally borrowed (not including interest rates or fees). It can also mean the amount you currently have left to pay before your loan is paid off.

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