The Pros and Cons of No Credit Check Loans
Taking out a loan with no credit check means taking on some fairly sizeable risks. Make sure you’re informed before you borrow one!
No credit check loans might seem like a great way to cover a surprise car repair or other unforeseen expense, but these loans can come with serious risks and downsides. Before you borrow, make sure you know everything there is to know about the good and the bad of no credit check loans.
Pro: You don’t need good credit
If you have good credit—with a score that’s roughly 680 or above—then you probably don’t need to turn to a no credit check loan. Another name for these loans is “bad credit loans” because they are generally aimed at folks whose low FICO scores lock them out from working with traditional lenders.
But if you do have bad credit, then a no credit check loan could provide some much-needed bridge financing during a time of great financial need. When your car breaks down or you have a surprise medical expense, a no credit check loan could be the thing that gets you out of a jam.
Traditional lenders like banks won’t lend to people with poor credit scores because they are seen as being at a higher risk of default. No credit check lenders, on the other hand, fill this gap in the financial services sector by lending to folks who don’t have a great history of using credit.
Some bad credit lenders still have approval processes that might lead someone with a very low score to be turned down for a loan. But many no credit check lenders don’t perform any kind of underwriting procedures. This means that you can get a loan, no matter how bad your credit.
Con: They’re very expensive.
This is the downside to no credit check loans enjoying wide accessibility. Since lenders are issuing loans to people with a higher risk of defaulting, the rates they charge necessarily have to be higher than the rates charged by traditional lenders.
How high are these rates? It varies from loan to loan, customer to customer, and even from state to state, as these loans are regulated at the state level. But across the board, the rates for no credit check loans are much higher than the rates for standard personal loans.
Short-term payday loans, for instance, have an average annual percentage rate (APR) of almost 400 percent, while title loans—which are secured by the title to the borrower’s car or truck—have an average APR of 300 percent.
But since most no credit check loans are short-term loans, wouldn’t that mean that their annual rates are beside the point? Not so fast. Later on in this article, we’ll cover how short-term cash advances can end up trapping borrowers in a long-term cycle of debt.
In the meantime, you should try shopping around for a soft credit check loan. These are lenders that examine a borrower’s ability to repay the money they’re borrowing before they lend to them with running a hard credit check. Not only does this help customers avoid predatory debt cycles, but it often means lower interest rates too.
Pro: They’re fast.
No credit check loans are designed as a form of bridge financing, which means that they are designed to bridge the gap between one paycheck and the next. As such, most no credit check lenders are good at getting you your money when you need it: fast.
With your typical storefront lender, you can likely walk out the door with the cash you need in hand. And even most online loans that don’t perform hard credit checks can get borrowers their money by the next business day, even when they can’t get them their funds the same day.
Con: They won’t help your credit score.
This might seem like it’s a pro, but it’s not. If you have bad credit, it’s likely that you have a poor payment history. Out of the five factors that make up your FICO score, your history of paying your bills on time is the most important, comprising 35 percent of your total score.
So when you borrow money and you pay it back on time, you want it to count! But most no credit check lenders don’t report your payment information to the credit bureaus, meaning that you won’t get credit for making your payments on time!
What’s more, failing to pay back your no credit check loan on time could still end up hurting your score! If the debt gets sent to a collection agency, they will report the account to the credit bureaus, causing further damage to your credit.
If you want a bad credit loan that can help your score, you should try looking shopping around for a bad credit installment loan. Many companies that offer these loans (like OppLoans) report payments to the credit bureaus, so paying your loan off on time could help improve your score.
Pro: We’re out of pros.
No credit check loans are a handy form of short-term bridge financing for people who absolutely need it. But between their interest rates (high) and their chances of positively affecting your score (low), there aren’t many arguments that one can make in their favor.
Con: You could get stuck in a cycle of debt.
Due to a combination of high interest rates, short terms, and lump sum repayment terms (meaning that you pay the loan off all at once), many no credit check cash advance loans can leave borrowers trapped in a predatory cycle of debt.
How does this cycle work? It’s pretty simple: A person takes out a $300 two-week payday loan to cover a surprise expense, then pays the loan back—plus interest—14 days later, for a total repayment of $345.
However, that $345 payment is so large that the borrower finds themselves needing another loan to cover future bills. Think about it: Subtract $345 from your paycheck and see how many financial sacrifices you would have to make in order to cover all your other costs.
The borrower then has two options: They can roll over their original loan—paying only the interest owed and receiving another two weeks to pay off what they originally borrowed plus another round of interest—or they can take out a brand new payday loan.
Either way, they end up in a cycle where every repayment leaves them just as far behind as they were in the first place, with interest charges accumulating but the principal loan amount remaining stubbornly unreduced.
According to research from the Pew Charitable Trusts, over 80 percent of payday loan borrowers don’t have enough money in their monthly budgets to cover their payday loan payments. And the Consumer Financial Protection Bureau found that the average payday loan user borrows 10 loans per year.
Pro move: avoiding these loans altogether.
While borrowing a safer, more affordable installment loan—reports payment information to the credit bureaus—can be a great way to avoid predatory no credit check loans. But the best way to avoid them is … to never need one in the first place.
This means building up your savings and improving your credit score. Aim for building a $1,000 emergency fund to protect yourself from future unforeseen expenses, and try to build your credit score up past 680, putting you in a better spot to borrow from traditional lenders.
Both of these solutions require hard work and a fair amount of financial discipline, but they are totally worth it in the long run. To learn more about how you can build your savings and your credit, check out these other posts and articles from OppLoans:
- How to Raise Your Credit Score by 100 Points
- Save More Money with These 40 Expert Tips
- Building Your Financial Life: Budgeting for Beginners
- Financial Basics: Expert Tips for Smarter Spending