What Is a No-Credit-Check Loan?
These loans are a classic case of "Buyer Beware"
It's possible to borrow without relying on your credit history if your credit prevents you from getting a loan, but beware. These loans are expensive, and they generally only make sense when all other options are off the table. In other words, your back is against the wall.
What Is a No-Credit-Check Loan?
This type of loan is pretty much what it sounds like—"pretty much" being the key words. The lender will typically run a credit check on you, but not a "hard" check to determine your actual creditworthiness. They'll just do a "soft" check, more or less to determine that you really do exist and to confirm your address and things of that nature.
The lender might or might not do this with one of the "big three" credit reporting agencies—Experian, Equifax, and TransUnion—and soft checks don't affect your credit in any way. And that's it. Your credit score might be 750 or 250. Either way, you'll most likely get the loan...but at exorbitant cost.
No-credit-check loans are typically short-term loans, and you'll have the money relatively quickly. These aren’t loans that you’ll repay over several years. A few weeks or months is more common, but loan terms can stretch up to two years. And you'll pay very high interest during that time. Annual percentage rates (APRs) can easily hit 400% or more, and finance charges can run up to 30% of the amount you borrow.
Typical Requirements for No-Credit-Check Loans
You can't simply hold your hand out and expect that a lender will drop cash into it while knowing nothing about you, which is why they generally do a soft check. Be prepared to at least confirm your identity and other information.
Age requirements typically apply—you must be at least 18 years old, but not over age 65. You must be a U.S. citizen. You must have a job or some other source of reliable income. You'll have to provide contact information. And you must have a bank account.
Do You Really Need One of These Loans?
In general, it’s best to avoid no-credit-check loans unless you’re truly out of options. They shouldn't be used to purchase “wants” or luxuries—they’re best reserved for serious needs. This type of loan might make sense if you need to fix your car so you can keep getting to work and earning a living, or to pay for a necessary medical procedure that you have no other way of funding.
What's Wrong With Them?
Consider this scenario: You don't have the available cash to make your no-credit-check loan payment, but the lender won't care about that. You must typically agree to automatic payment withdraws from your bank account when you set up the loan, so the lender won't call you first to make sure it's OK to make the debit.
The lender will simply automatically withdraw its payment from your available funds. What if you already have a pending payment to your mortgage company or landlord? This might well be your most important monthly payment...and now it bounces.
Late fees, overdraft fees, and further credit dings can quickly snowball, leaving you in a situation that's even worse than the one that required you look into a no-credit-check loan in the first place. And this is on top of those interest rates, which can make it hard to meet the monthly payment in the first place.
Other Lending Options
Your credit might be bad, but it’s always worth applying for a more traditional and most likely less expensive loan first before you take the no-credit-check option. You can always move on if you're turned out, and you'll never know unless you ask.
Visit your bank or credit union to explore your options for borrowing. You’ll most likely want a personal unsecured loan if you're not purchasing a car or a home. Those loans allow you to do whatever you want with the money, and they might provide more time for you to pay off the balance than the terms a no-credit-check loan would offer.
Perhaps most important, these loans come with lower interest rates and fees so it will cost less to borrow—a lot less. And a loan from a traditional lender will also help you build or repair your credit, while no-credit-check loans won't do this. No-credit-check loans don't typically report your loan activity to the credit bureaus.
In the meantime, you might want to consider other loan options for those with poor credit if a traditional lender turns you down.
No-credit-check loans are very much like payday loans, which are also expensive, short-term loans. In fact, a lot of advertisements for no-credit-check loans are really just ads for payday loan programs. These lenders don’t make loans based on your credit score. They look at your income instead, and they assume that you’ll keep your job long enough to pay off the loan.
Another common type of loan is a longer-term loan that you get by pledging collateral. Car title loans allow you to borrow against the value of your automobile. The lender gives you cash, and you must authorize it to take your vehicle if you fail to repay the loan on time.
Car title loans can be especially problematic if you fail to pay and you need your car to get to work to continue earning an income.
Consider a Cosigner on a Traditional Loan
Yes, your cosigner will be on the hook for repayment if you default, and her credit will be hurt, too. It might be difficult to find someone who's willing to go out on a limb for you like this. But a family member might be do so if you're facing a financial emergency...or might even personally loan you the money instead. The worst that could happen is you wouldn't be able to pay her back...but at least her credit score will stay safe and sound.
Finding a Lender
The internet might be your first, best option. Some online lenders specifically work with those with poor credit, and they're typically more reputable than that local guy on your street corner.
Some credit unions offer far more reasonable payday loans to their members, so look into this first if you qualify before you bite the bullet on a no-credit-check loan.
Check the background and history of any lender you're considering. The Federal Financial Protection Bureau can be a good place to start, and an internet search will most likely produce comments and ratings from other borrowers.
The most common no-credit-check loan scams involve charging fees while providing nothing in return. Application fees aren't unheard of, but beware of lenders who want fees upfront because you might not get what you pay for.
Fees should be clearly disclosed. Reputable lenders will tell you what to expect, while scam artists will just take what they can for as long as you’ll give it to them. Any fees should be taken out of your loan proceeds after your loan is approved.
Remember that these loans are always going to be expensive because they're risky loans for a lender to make. You’re probably not getting the whole picture if you don’t see some hefty costs involved, such as a high interest rate or loan processing fees that will be taken out of your loan proceeds.
The Bottom Line
Start building or rebuilding your credit as soon as possible to avoid these types of loans in the future. You’ll be able to borrow much less expensively someday, and you’ll have more options available to you.
- You might start with a secured credit card where you put down a deposit with the lender to cover your balance in the event that you do default.
- Ask a family member to add you to his credit card as an authorized user. This activity will sometimes show up on your credit report and can improve your score if it's kept in good standing.
- Bad credit doesn't have to be a forever thing, but a no-credit-check loan can turn into a nightmare that snowballs and puts you at even more of a financial disadvantage.