What Does a "No Credit Check" Loan Really Mean?
If you have bad credit, getting a safe, responsible loan can feel impossible. After all, any legit lender is going to run a credit check. And once they see your score, they'll just turn you down flat, right?
Wrong.
There are lenders out there who run credit checks but still lend to people with bad credit.
To explain how this works, we've gotta get some stuff out of the way first. Namely, we need to talk about the difference between hard credit checks and soft credit checks.
Hard credit checks
A hard credit check means pulling a full copy of your credit history.
Most often, a hard credit check occurs when a person is applying for new credit. Many lenders see too many hard checks as a sign that a person is desperate for credit, which makes the lenders less likely to lend to them. In fact, running a hard credit check can actually lower your credit score by up to five points!
According to the experts at FICO, a person with six hard credit checks within a one-year span is eight times as likely to file for bankruptcy than someone with no hard checks.[1]
Soft credit checks
A soft credit check returns much less data than a hard check. Instead of a person's full credit report, it gives them a brief overview.
While hard credit checks have to be authorized, soft credit checks don't. You know those pre-approved credit card offers you get in the mail? Those lenders likely ran a soft check on you before sending you the offer.
The great thing about soft credit checks is that they don't show up on your credit report. Or rather, they don't show up when other people look at your credit report. If you request a copy of your report, you'll be able to see your history of soft credit checks, but other parties who look at your credit will not.
For all intents and purposes, soft credit checks do not show up on your credit history—and they definitely do not affect your credit score.
Okeedoke. Now that we've got that out of the way…
What are no credit check lenders?
Next time you see an ad for a “no credit check lender” just go ahead and replace the words “no credit check” with “payday” because they are usually one and the same. (You can read all the details about no credit check loans here in the OppU Ultimate Guide to No Credit Check Loans.)
The reason that payday lenders don't check their customers' credit is because they don't care if their customers can't pay their loans back.
Actually, you know what? Scratch that. They are actively counting on their customers not being able to pay their loans back on time. The more customers that can't afford their loans, the more loans the payday lender gets to rollover.
What's loan rollover?
It's the worst. Really.
Loan rollover is a process in which payday lenders offer their customer an extension on the due date of their loan. It sounds nice at first, but it's really just a chance for the lender to charge the borrower additional interest for borrowing the same amount of money.
Here's an example:
You take out a $300 payday loan that costs $15 per $100 borrowed. The loan is due in 14 days, and you will owe $345 (The $300 that you borrowed + $45 in interest).
But when that 14 days is up, you find that you don't have $345 to spare. So you roll the loan over. You only pay the $45 that's due in interest, and you get another 14 days to pay back the $345 you still owe.
See what happened there? You pay the lender the $45 in interest, and then they charge you an additional $45 for the two-week extension. A loan that cost you $15 per $100 borrowed now costs you $30 per $100.
Measured as an annual percentage rate (APR), the true cost of this loan is pretty staggering: 390%. If you had that loan outstanding over a full year, you would pay almost four times what you borrowed in interest alone.
The real problem with no credit check loans...
Now, a 390% APR might not seem to matter so much for a loan that's only two weeks long, but that's precisely why rollover is so sneaky and awful: the more you roll the loan over, the more expensive your loan becomes (read more in The Truth About No Credit Check Loans).
That's why payday lenders don't run a credit check on their potential customers. Whereas most lenders are concerned about whether their customers can afford to repay their loans, payday lenders are the exact opposite: They are hoping their customers can't repay.
Don't believe us? Well how about this:
According to the Consumer Financial Protection Bureau (CFPB), over 80% of payday loans are the result of rollover or reborrowing.[2] Basically, if payday loan customers could actually afford to pay their loans on time, the industry would go kaput.
Not. Great.
What about soft credit check loans?
Both “no credit check” and “soft credit check” lenders lend to people with bad credit, the kinds of folks who most traditional lenders would turn down. The big difference between the two is that “soft credit check” lenders genuinely care about whether or not you can repay the loan they're offering.
That's why soft credit check lenders check your credit before extending you an offer. They want to make sure it's a loan you can actually afford. Unlike no credit check lenders, they don't plan on rolling over your loan again and again and again. They intend to give you a loan that you can pay off the first time.
But that's not the only difference. While payday lenders offer you short-term loans that you have to repay all at once (something that few borrowers can actually afford to do), soft credit check lenders usually offer long-term installment loans. These loans are designed to be paid off a little bit at a time, with equally sized, regularly scheduled payments.
And many times these loans are amortizing, which means that (long story short) you can save money by paying the loan off early, something you can't do with payday loans.
References:
- “What are inquiries and how do they affect my FICO score?” MyFico.com. Accessed November 14, 2016 from http://www.myfico.com/crediteducation/questions/inquiry-credit-score.aspx.
- Burke, K., Lanning, J., Leary, J., Wang, J. “CFPB Data Point: Payday Lending.” Consumer Financial Protection Bureau. Accessed November 14, 2016 from http://files.consumerfinance.gov/f/201403_cfpb_report_payday-lending.pdf.
