See the results of our 2022 Personal Finance Study!
Looking for a Loan with No Credit Check? Here Are the Pros and Cons
If you take just a few minutes to check out the Financial Sense Blog (and you should, we work hard on it) you’ll see many articles about how you can improve your credit and why your credit is so important.
And the main reason why your credit score is so important is that it allows you to get better rates on loans and credit cards. Unless you’re the kind of rich where you use Benjamins as napkins, you’re going to need to borrow money at some point. So what can you do if you need a personal loan, but you don’t have good credit?
One option you might consider is a no credit check loan. Even though that might sound too good to be true, they do exist! But they come with a catch. Multiple catches, actually. Let’s get into it.
Credit check check-in
Before we get into the details of no credit check loans, let’s just go over what a credit check is. On a basic level, when a potential lender performs a credit check on you, they’re looking to get a copy of your credit report, which contains information on how you've used credit in the past.
You actually have three credit reports, one each from the three major credit reporting agencies: Experian, TransUnion, and Equifax. Information across the credit reports can vary, which means that your credit score can change depending on which report is used to calculate it. To request a free copy of your credit report, visit www.AnnualCreditReport.com.
There are two kinds of credit checks: hard credit checks and soft credit checks. Hard credit checks show up on your credit report temporarily and will negatively affect your credit score. Soft credit checks will not. So if you are considering a loan that requires a credit check, that’s one factor to take into account.
Pro: they don't require a credit check.
The advantage of no credit check loans is right there in the name. You don’t have to undergo a credit check to get one, so you could qualify for one even if you can’t pass a credit check.
As for the negatives … there are quite a few.
Con: they're more expensive.
“Typically, when a loan calls for no credit check, it attracts individuals who might not have stellar credit histories,” explained CPA Riley Adams. “As a result, these loans can sometimes have higher hidden costs in the form of higher fees, interest rates, or onerous terms which make repaying the loan difficult.
"While advisable to avoid taking out such loans, the reality is a lot of people rely on low incomes, have little-to-no-savings, and haven't been able to build a solid credit history to be attractive to the most advantageous lenders.
Pro: they're fast and easy.
“A benefit of a no credit check loan is that quite often," said Adams, "the application and work required to receive the money are fairly straightforward and easy and the money is available the same day or next.
"However, as mentioned before, there are likely to be hidden costs in exchange for this easy access to cash in times of need.”
Con: predatory lenders abound.
Not only do no credit check loans appeal to those have negative credit histories, but they’re also marketed to those who may not always have the best financial knowledge.
“The problem with these unconventional loans is they are typically marketed to people who are the least financially sophisticated and capable of understanding and evaluating the risks that they are taking with these loans,” warned bankruptcy attorney Bradley R. Bailyn.
“Obviously this type of loan presents a higher risk for the lender which is going to translate into much higher interest and fees for the borrower. There are situations when someone who can afford the mortgage would take such a loan, but generally, it’s going to be people who are not qualified for this kind of financing and who are going to end up losing the down payment which may constitute their entire life savings.”
Con: they could trap you in a debt cycle.
And it can be very hard to undo the damage done by taking on one of these no credit check loans.
“Taking out a no credit check loan is putting yourself on the fast track to getting trapped in a debt cycle,” Leslie H. Tayne Esq., Founder and Head Attorney at Tayne Law Group, told us.
“Because of the extremely high interest rates, you may end up taking out another loan or paying to extend the length of your current loan. Both of these means you’re paying even more in interest and getting stuck in a vicious cycle that is incredibly difficult to break out of.”
Consider all your options.
So what are your options if you don’t have great credit but you’re worried about the dangers of no credit check loans?
Here are some alternatives Tayne suggested:
“Many smaller community banks and credit unions will offer small personal loans to customers with poor credit. These will have capped interest rates, which will be much more reasonable than a no credit check loan.
“Get a cosigner: Rather than opting for a no credit check loan, consider asking a friend or relative to be a cosigner on a personal loan. However, be sure you recognize the responsibility of having a cosigner. If you default on the loan, the cosigner is responsible for repaying the loan.
“If money is very tight, consider negotiating some of your bills. You can talk to your landlord, cable provider, phone company, etc. about lowering your monthly payment or extending your due date. It’s very possible that they will say no, but you’ll never know if you don’t ask. And if they agree to it, it can provide you with some relief for the time being.
“Turn to your emergency fund: Rather than taking out a loan, use your own money if possible. If the situation is truly a financial crisis, your emergency fund is there for a reason.
“Improve your credit score: Working to improve your credit score will improve your overall financial health and help you get approved for a traditional personal loan, should you need one. The most effective way to improve your score is to make your payments on time and as completely as possible.”
Should you check out a soft credit check loan?
You could also look at different kinds of bad credit loans and installment loans that may require a soft credit check or another way of verifying your ability to repay. But some of these can be risky.
“Other services also exist which can provide access to credit at better rates than say, ‘payday lenders,’ who can charge rates in excess of 400-500% in order to guarantee they recoup their money and receive a profit,” Adams confirmed. “These lenders are some of the worst you can deal with given their penchant to charge the highest costs on the least creditworthy borrowers. There is almost always a better choice if you look hard enough.”
Having bad credit isn’t an easy situation. But if you aren’t careful about the kinds of loans you seek out, it can get even worse.
Riley Adams (@TheRiles89) is a licensed CPA in the state of Louisiana working as a Senior Financial Analyst for a Fortune 500 company in New Orleans. He has a personal finance blog dedicated to helping young professionals find financial independence at YoungAndTheInvested.com.
Bradley R. Bailyn has a lifelong background in and passion for finding legal solutions to financial challenges for individuals and small businesses. His knowledge and skills are diverse by necessity, including lawsuit defense and asset protection strategies, structuring real estate transactions, modifying costly loans, mortgages and business contracts, fighting foreclosures and evictions, structuring commercial real estate leases, employment law compliance, government investigations, fines and penalties, due diligence in the M&A process, and fighting bills for tax and utility arrears.
Leslie H. Tayne, Esq. (@LeslieHTayneEsq) has nearly 20 years’ experience in the practice area of consumer and business financial debt-related services. Leslie is the founder and head attorney at Tayne Law Group (@taynelawgroup), which specializes in debt relief.