It’s all about finding the right loan for you ... and also avoiding the many no credit check loans out there that could trap you in a predatory cycle of debt.
When you have bad credit and you need a loan, the last thing you want is some lender running a credit check on your application. You already know your score is lousy, and you don’t need a hard credit check dropping it even further.
That’s where no credit check loans come in. But while they might seem perfect for someone who needs money now and has bad credit, they come with significant risks. Before taking out a loan with no credit check, you need to know exactly what you’re getting yourself into and what potential pitfalls to avoid.
What are no credit check loans?
The most common types of no credit check loans are payday loans. These are small-dollar short-term loans that rarely run more than a couple of hundred dollars and that come with an average repayment period of two weeks.
Title loans are another type of short-term no credit check loan; they come with slightly higher principals and longer repayment periods. Unlike payday loans, title loans are secured, using the title to the borrower’s car or truck as collateral.
No credit check loans are oftentimes much easier to obtain than regular personal loans. Even though they don’t run a credit check, some lenders will verify a borrower’s income before lending to them, while others simply ask for as little as an ID and a valid bank account.
Why don’t these lenders check credit scores?
When you apply for a loan from a traditional lender like a bank, they will check your credit history as a part of the application. This involves running a “hard check” on your credit, which returns your credit score and a copy of your credit report.
Checking your credit history allows these companies to assess how you’ve fared when borrowing money in the past, and it also gives them a window into how much debt you currently owe. Both of these factors help them make their decision. If you have a poor credit score, the odds are very high that you’ll be rejected.
But with no credit check loans, the process is quite different. These loans are most often used by people who already have low credit scores. This makes checking the borrower’s credit a little beside the point.
When a lender runs a hard credit check on a person’s credit history, that check is recorded on the borrower’s credit report and can temporarily lower their score—even if the application is denied. One of the main advantages to no credit check loans is that applying for one won’t impact the borrower’s credit score at all.
However, there are also many downsides …
They’re more expensive.
Since most no credit check loan borrowers have lower credit scores, the default rate (or the percentage of customers that fail to pay back their loan) is much higher than the default rates for regular loans.
As such, no credit check loans come with much higher interest rates than standard personal loans. And some of them, including payday loans and title loans, come with rates that are way, way higher!
But it can tricky to see just how much higher they really are. Standard personal loans come with interest rates below 36%—and oftentimes well below that for borrowers with prime credit scores. Meanwhile, the average rate for a payday loan is 15%, while the average rate for a title loan is 25%. Those numbers seem a little on the higher side, but generally fine.
Except here’s the catch: The interest rate for those personal loans is assessed on an annual basis, while those interest charges for payday loans are only assessed over periods of two weeks and one month, respectively.
Whenever you’re shopping for any kind of loan or credit card, make sure you check its annual percentage rate (APR) to get a similar comparison between products. The APR for a two-week payday loan with a 15% interest charge is almost 400%, while the APR for a one-month payday loan with a 25% interest charge is 300%!
As we said, the interest rates for some of these no credit check loans are way, way higher!
It won’t help your credit score.
The most important part of your credit score is your payment history, which makes up 35% of your total score. Every time you make a credit card payment, a loan payment, or even pay your rent (in some cases), that information gets recorded on your credit report. So much as one late payment can dramatically impact your score.
For folks with bad credit, building a positive payment history is one of the best things they can do to improve their score. But with short-term no credit check loans, most lenders don’t report payment information to the credit bureaus, meaning that on-time payments can’t help borrowers build their payment history and improve their overall score.
This is the flipside of no credit checks. These lenders don’t care if their customers have poor credit, but they often don’t take steps to help customers improve their credit, either.
You risk entering a cycle of debt.
Here’s how a cycle of debt works: A borrower has so much debt that they can’t afford to pay it off. All they can afford to do is make their minimum payments—which isn’t nearly enough, but still adds up to quite a bit of money every month.
Because they’re putting so much money into their debt, they can’t afford to save any money either. When an unexpected bill arises, all the person can do is …. take on more debt to cover it! This means they have to start putting even more money towards their monthly minimum payments. And so the cycle continues.
Here’s a slight variation on that: A person takes out a $300 payday loan to cover a car repair and has to pay back $345 two weeks later. When their due date arrives, they find that paying $345 all at once will leave them with no money to buy groceries.
This person then pays off their loan and immediately takes out a new payday loan, once again paying $45 in interest on a $300 loan. Two weeks later, the same thing happens. This time, they roll over their loan, paying off the $45 owed and receiving a two-week extension … in return for an additional $45 interest charge.
Two weeks after that, they still can’t afford to pay back their loan, and so the cycle continues.
A study from the Pew Charitable Trusts found that well over 80% of payday loan borrowers didn’t have the money in their monthly budgets to cover their loan payments. This is partly because payday loans (and other short-term no credit check loans) require borrowers to pay their loans off all at once.
If you’re looking for a no credit check loan, consider an amortizing installment loan. These loans are designed to be repaid in a series of smaller, regularly scheduled payments—and their amortizing structure means that every payment goes towards both the interest and the principal amount owed. Each payment you make will bring you one step closer to zeroing out your debt.
Look into a “soft credit check” loan.
Folks with bad credit who need to borrow money to bridge an unexpected financial gap—and who can’t borrow it from friends or family—could look into a variation on no credit check loans called “soft credit check” loans.
A soft credit check returns less information than a hard credit check, but it still gives a lender some idea of a borrower’s history with credit. Along with other underwriting factors, like income verification, a soft credit check can help a lender determine whether or not a person can actually afford the loan they’re applying for.
And that’s really the key. When you have bad credit and you need a loan—especially in times of financial emergency—it’s all too easy to borrow a loan that you can’t really afford to pay back. That’s how people end up trapped in a cycle of debt, with their financial outlook looking dimmer by the day.
Other than building an emergency fund, the best way to avoid no credit check loans is to … improve your credit score!
Subscribe to our newsletter for more marketing news & industry trends
The information contained herein is provided for free and is to be used for educational and informational purposes only. We are not a credit repair organization as defined under federal or state law and we do not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit. Articles provided in connection with this blog are general in nature, provided for informational purposes only and are not a substitute for individualized professional advice. We make no representation that we will improve or attempt to improve your credit record, history, or rating through the use of the resources provided through the OppLoans blog.