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Borrowing money isn’t out of the question when your credit is poor, but loans without credit checks are expensive and can trap you in a cycle of debt. (iStock)
If you need money for an unexpected expense but your credit isn’t good enough to qualify for a traditional loan, you might think a no credit check loan is a good idea. While borrowing money when you have bad credit is not out of the question, products without credit checks come with exorbitant fees and should only be considered as a last resort.
Let’s take a look at how no credit check loans work, why you should avoid them, and some alternatives for borrowing when you have a poor or poor credit history.
What is a no credit check loan?
With a loan without a credit check, the lender does not check your credit report and score before deciding to grant you a loan. To offset the risk of lending money to borrowers with potentially poor credit histories, lenders without credit checks charge high interest rates and fees.
You may come across different types of loans with no credit check, such as payday loans, title loans, and personal installment loans.
Why do lenders check your credit?
Your credit report and score help lenders understand how you’ve managed your credit in the past and estimate your likelihood of paying off a new loan. For this reason, it is common to undergo a credit check when completing a loan application. Lenders aren’t looking for a perfect credit report, but they’re looking for history of missed payments, debts in collection, or a bunch of recent credit applications. Have a lower credit score may affect the types of rates and terms available to you and may even prevent you from obtaining a loan.
If you need a loan, Credible lets you compare personal loan rates to see what you might qualify for.
How do no credit check loans work?
Most reputable personal lenders will check your credit before agreeing to give you a loan. Types of lenders who don’t check your credit before giving you a loan often include payday lender shops, title loan shops, pawnbrokers, and online lenders.
To compensate for the omission of a credit check, these lenders typically charge high interest rates and fees. Even if you don’t have to submit to a credit check, you will still need to prove your identity and any source of income.
Keep in mind that most lenders without a credit check make no effort to ensure that you will be financially able to repay your loan on time. This is how a few different no credit check loans work.
- Payday loans — After being approved for this little one, short term loan, you will receive your funds in the form of cash, check or direct deposit to your bank account. You must repay your loan – plus any finance charges or fees – by the due date, which is usually your next paycheck, or within 14 days. Finance charges are generally based on the amount of the loan, and payday loans come with a fee equivalent to an APR of 400% or more, depending on the loan amount. Consumer Financial Protection Bureau. To apply, you’ll probably only need to share your ID, have a bank account, and prove that you have a regular salary.
- Securities lending — With a car title loan, instead of going through a credit check, you’ll use your vehicle title as a form of security to reassure the lender that you will repay your loan. You can apply for a title loan at a title lender’s physical or online store. Title loans typically range from 25% to 50% of the car’s value. To qualify, you must own the car in its entirety – it cannot currently be financed by a lender. You will need to bring your vehicle, title, photo ID and proof of insurance to the title loan store to receive the loan. Be careful here – once you’ve signed the contract, you must pay the loan fees and interest in full, as the lender may retain title to your car until you pay off your debt. You also risk the lender repossessing your car if you don’t repay your loan on time. In many states, securities lending is actually illegal.
- Pawnbrokers — In some cases, pawnbrokers can be cheaper than payday loans, but you risk losing the item you pawned or paying a fee to extend your repayment term. Pawnshops accept items as collateral and, in exchange, provide a short-term loan equal to a certain percentage of the item’s value. If you repay the loan with interest during the repayment period, you will get your pledged property back. If you can’t repay the loan, the pawnbroker will try to sell your item for a profit.
- Personal installment loans — A personal installment loan is a loan that you repay in installments or periodic installments. You can pay interest on each payment, and once you repay the entire loan, your account will be permanently closed.
Credible lets you compare personal loan rates from multiple lenders in one place.
Why are no credit check loans generally a bad idea?
Loans without a credit check are extremely expensive. The average two-week payday loan has a fee of $15 for every $100 borrowed, which equates to an APR of almost 400%. A credit card, on the other hand, usually has an APR ranging from 12% to 30%.
Payday loans are considered a type of predatory lending because lenders usually make no effort to ensure that you can actually repay the loan. So, if you are already in financial difficulty, one of these loans may actually make your situation worse. Payday lenders don’t consider your other financial obligations when deciding how much to lend you, which can lead to you biting off more than you can chew.
Some types of no credit check loans turn into a new loan unless you pay them back in full by a specific date. When this happens, interest continues to accrue and you can go into more debt. It can take years to get out of what you thought was short-term debt. Some lenders may add – and charge you – other products that you don’t need, which can further increase the cost of the loan.
What are the risks of a loan without a credit check?
Due to their high fees and interest rates, paying off a loan without a credit check can easily go wrong. Let’s look at how the exorbitant APR of a payday loan can add up to using a credit card (which is also considered a form of high-interest loan, but much cheaper than a payday loan) over a 30-day term.
payday loan
- Amount of the loan: $500
- APR: 399%
- Repayment period : 30 days
- Amount: $663.97
Credit card
- Amount of the loan: $500
- APR: 36%
- Repayment period : 30 days
- Amount: $514.79
These examples make it easy to see how taking out a payday loan puts you at risk of increasing your debt, worsening your financial situation, further weakening your credit or, in the case of a title loan, losing a part of your property. Of course, it should be noted that the credit card is more advantageous when you actually pay off the debt in one statement cycle. If you don’t pay it within 30 days, interest will continue to accrue on the credit card balance.
Alternatives to No Credit Check Loans
No credit check loans aren’t the only way to get cash when you need it. If you have poor credit, here are some options that can provide financial support without fees and exorbitant interest rates.
Personal loans for bad credit
A loan for bad credit is a type of personal loan designed for those with bad credit. You will borrow money from a lender and repay it over a set period of time.
What it costs: Has higher interest rates than traditional personal loans, but better rates than a payday loan
How to get it: Through certain personal lenders
For whom it might be best: Those with credit down
Loan from family or friends
If you have a friend or relative who is willing to help you, you may be able to get a loan from them. You can create a formal agreement to make the loan more formal and avoid confusion.
What it costs: It depends on whether the friend or relative wants to charge you interest or fees. In many cases, a loan from a loved one is interest free.
How to get it: Ask a friend or relative for financial help.
For whom it might be best: Someone who is reliable and has strong relationships that will not be damaged by borrowing money
Credit union loan
A payday alternative loan, or PAL, is a type of personal loan that can only be taken out from a credit union. Loans from credit unions can be easier to apply for, and if you don’t qualify, the credit union can work with you to help you become more eligible for a loan.
What it costs: Loans from credit unions often cost less than those from for-profit financial institutions.
How to get it: Apply for a personal loan from your credit union (note that you will usually need to be a member of the credit union for at least one month before you can qualify for a loan).
For whom it might be best: Credit union members
If you are looking for an alternative to the loan without a credit check, compare the personal loan rates using Credible.
