One thing you may be wondering before you start applying for loans is if you’ll need a bank account to get one. And the answer is – it depends.
The Type of Loan Matters
If there is already collateral on the loan, then it’s less likely you’ll need a bank account to get approved. For example, many are surprised to learn that they don’t need a bank account to obtain an auto loan. But when you get an auto loan, the car serves as collateral. If you default on your loan, the dealership can simply repossess your car.
It’s the same way with title loans, which are loans where you provide the lender with your car title and leverage the value of your car to get the loan. These are short-term loans, and again, your car is the collateral, so the lender can repossess it. Of course, these loans also tend to carry extremely high interest rates, so they’re best avoided whenever possible.
Two More Important Factors
Not having a bank account likely won’t your main issue if you’re applying for a loan. But if you don’t have a bank account and you don’t have good credit, then you’re considered a subprime borrower. This increases the chances that the lender denies your loan request entirely, and even if the lender approves you, you will need to pay a much higher interest rate.
So, your credit score is one significant factor when it comes to obtaining most types of loans. The aforementioned title loans and other short-term loans typically don’t require a credit check, but that’s because the interest rates are going to be high no matter what. For all other types of loans, the higher your credit score is, the better. Once you get below 700, you could see interest rates rise.
The other factor that most lenders will look at is your income. This helps lenders determine if they will approve you for a loan and how much they will approve you to borrow. Keep in mind that lenders are essentially looking to answer one question during the application process – will you pay back the money they lend you? Every borrower presents some degree of risk. A lack of a bank account doesn’t necessarily make you a riskier borrower, but other factors that are related to your lack of a bank account, such as a poor financial history, could.
Your Bank Account Doesn’t Affect the Lender
Something else to consider is that your lack of a bank account has minimal effect on the lender. It’s not like the lender can seize the funds in your bank account if you default on your loan. They may charge your account for your loan payments, but that will only be if you set up direct deposits with them. Certain types of loans, such as payday loans, require you to have a bank account so they can automatically withdraw your loan payment from the account.
If the lender isn’t charging your bank account for your payments, then whether you have an account doesn’t affect them. Their recourse, should you default on your loan, is repossessing any collateral, taking you to court, or sending the bill to collections.
Rebuilding Bad Credit
The good news is that even if you don’t have the best credit, by obtaining a loan, you can start to rebuild it. As you make your loan payments on time, your credit score will go up. Remember that it’s also possible to harm your credit further if you default or make late payments, so it’s crucial that you stay on top of paying your bills.
While you don’t need a bank account to get many loans, it’s still a good idea to have one. Saving money is an important habit, and the sooner you start, the better. Even if you have bad credit, shop around and you should be able to find a bank that will work with you.