You might be familiar with the high APRs that come with no credit check loans, but did you also know that their lump sum payments could end up driving you into a cycle of debt?
No credit check loans can be a workable financial solution when you need cash in a hurry. But that doesn’t mean you should simply take the first loan you see advertised or enter the transaction without understanding the risks.
When shopping around for a short-term no credit check loan, these are the three risks you need to know.
1. High APRs.
This isn’t so much a risk as it is a given. No credit check and other bad credit loans come with much higher interest rates than standard personal loans. Due to the increased risk of default, there’s really no way around it.
But short-term no credit check loans have APRs that are extremely high, even compared to other types of bad credit loan products. And while these products may seem like a great way to get out of debt fast, their high APRs could help trap you in a recurring cycle of debt.
Simply looking at the interest rate for one of these loans doesn’t tell the whole story. For instance, a 15% interest charge on a two-week payday loan doesn’t sound that bad, right?
That’s why you should check the APR. Regular loans calculate interest on an annual basis, while short-term loans calculate interest by the week or the month. As such, a two-week rate of 15% translates to an APR of 391%!
Yeah, we weren’t joking about these loans being way more expensive than standard loans or credit cards. If you have bad credit and are looking for a loan, a lower APR is one factor you should definitely be keeping in mind.
2. Unaffordable payments.
As we mentioned in the previous section, a short-term loan might seem like a great way to get out of debt quick, but those shorter terms can end up working against you, too. And one way that a short-term loan can spell trouble is through the size of their payments.
Unlike installment loans, which are paid off a little bit at a time, short-term no credit check loans are paid off in a single lump sum. And while this may seem convenient, it isn’t always. Many payday users find that this single payment is more than they can afford in such a short span.
Think about it: The reason that many people take out a payday or title loan is that they’re facing an unexpected expense or financial shortfall. Even if the due date is set on their next payday, paying back the amount they borrowed plus interest only weeks after they borrowed the loan is going to blow a brand new hole in their budget.
When someone can’t afford to make their loan payment, many of them end up having to roll over their loan—extending the due date in return for an additional interest charge—or borrowing a new loan immediately after they pay off the old one. If they have to do this repeatedly, it means they’ve become trapped in a cycle of debt.
This is a reality for many no credit check borrowers. According to a study from the Pew Research Centers, over 80% of payday loan customers don’t have enough money in their monthly budgets to cover their payments, while the Consumer Financial Protection Bureau found that the average payday borrower takes out 10 loans per year.
Before opting into a short-term payday or title loan, you should look into the bad credit installment loan options available in your area. A longer repayment period means smaller individual payments, which could fit more easily into your budget.
3. Lenders that don’t check if you can repay.
Before taking out a bad credit loan, you need to look over your budget and make sure that you can afford your payments without having to take out an additional loan. And one of the reasons that you need to do this is that many no credit check lenders won’t.
This is very different from how traditional lending institutions work. Making sure that their customers can repay is why banks and other personal lenders check an applicant’s credit in the first place. If their score is too low, that means that the risk of them defaulting is too high, and the lender will refuse to extend them credit.
But many no credit check lenders do just the opposite. They don’t do anything to see whether or not a potential customer can afford the loan they’re applying for. If they end up needing to rollover or reborrow their loan, these lenders stand to make more money than if the person paid their loan off on time.
Instead, you should look for a bad credit lender that checks whether or not you can repay your loan. This could be a soft credit check (which won’t affect your credit score) or it could mean verifying your income. Whatever method they use, it shows that these lenders care.
Before you click “yes” on an online loan agreement or head down to your local brick-and-mortar payday lender, make sure you account for the three risks laid out in this article. If you can find a lender that addresses all three, odds are you’ve found the right no credit check loan for you.
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