The Benefits (and Drawbacks) to No Credit Check Installment Loans
No credit check installment loans are far from perfect, but they have a leg up on short-term payday loans. Here’s everything you need to know.
When you have bad credit and you need to borrow money, your options don’t usually inspire a lot of confidence. What else can you do but settle for a short-term, high-interest payday loan or title loan?
Well, that’s where no credit check installment loans come in. Like short-term cash advance loans, applying for one won’t hurt your credit, but they also come with longer terms and more manageable payments.
Then again, it’s not like these installment loans are absolutely perfect. They’re not. They come with a long list of pros and cons, just like any other financial product.
With that in mind, here’s an overview of the benefits and drawbacks to borrowing a no credit check installment loan—with a special emphasis on how they stack up compared to payday loans.
Benefit: You can borrow more.
Many states have fairly strict limits as to how much a person can borrow with a short-term payday loan. Usually, the maximum loan amount won’t be more than several hundred dollars.
This means that payday loans won’t be helpful for larger financial needs. Sure, you could use one to stretch your budget over the last few days before a paycheck, but something like a car repair bill or surprise medical expense will probably require more money than a payday loan can provide.
This is where no credit check installment loans can come in handy, as they usually come with much larger average loan amounts. If the bill you need to cover is over $1,000, an installment loan is likely going to be a much better form of bridge financing than a two-week payday loan.
Of course, these loan amounts will vary from state to state, from lender to lender, and from customer to customer. The good thing about no credit check installment loans and payday loans is that you can apply for one and learn how much you’ll be approved for without having an inquiry show up on your credit report!
Benefit: Lower interest rates.
This is another benefit that will vary depending on your specific financial situation, your state of residence, and the particular lender that you’re working with. All that having been said, a bad credit installment loan is very likely to come with a lower annual percentage rate (APR) than your standard payday loan.
You’ll always want to check out the APR for any personal loan that you borrow, but you want to pay special attention to it when borrowing a payday loan. Due to their short repayment terms, the stated interest rates for these loans can vary wildly from their actual APRs.
For instance, a two-week payday loan with an interest rate of fifteen percent has an APR of 391 percent! What?! That’s because APR measures the cost of a loan over one full year. It’s a standardized metric that lets you make apples-to-apples comparisons between different types of loans.
Granted, no credit check installment loans are still going to have a much higher interest rate than regular personal loans. But even an installment loan with a 130 percent APR still comes at less than one-third the cost of a payday loan with an APR of 400 percent.
Drawback: More interest paid overall.
This is one area where comparing bad credit installment loans and payday loans can get a little tricky, so please bear with us. This seems like a truly major drawback on paper, but in reality, it’s a little more minor.
Because payday loans have such short repayment terms, paying one off on time means paying far less in actual interest than you would on an installment loan—even one with a much lower APR.
This is why payday loans seem so appealing. Sure, their APRs are high, but why would you worry about the cost of the loan over a full year? You’re going to pay it back in two weeks! $15 per $100 borrowed is a lot less than $120 per $100, right?! It’s so obvious!
Here’s where things go sideways. Because, yes, on paper, payday loans cost much less than installment loans. But in reality, many payday loan customers struggle to pay their loans back on time. And the longer they are in debt, the more relevant those high APRs become.
Here are some numbers that should give you pause: According to a study from the Consumer Financial Protection Bureau (CFPB), the average payday loan customer takes out 10 loans annually and spends almost 200 days every year in debt. That means paying an effective interest rate between 150 and 219 percent on a payday loan with a 391 percent APR.
So, yes, you’ll end up paying more with an installment loan than you will with a payday loan, even if the former has a much lower APR than the latter. But that’s not the whole story.
Benefit: More manageable payments.
Why do so many payday loan borrowers end up taking out so many loans? Well, the reasons go beyond the interest rate. They also have to do with the size of their payments.
Simply put, many people struggle to pay back several hundred dollars within two weeks. And even if they do make the payment, it oftentimes creates another budget shortfall, which then leads to them taking out another payday loan.
According to a study from The Pew Charitable Trusts, only 14 percent of payday loan borrowers have enough money in their monthly budgets to pay back their loans on time. That’s not a lot!
Borrowers who find themselves in situations like this are often faced with two options. They can roll over their loan, which means that they pay only the interest owed and then get a new repayment term, complete with more interest, or they can take out a new loan immediately after paying off their old one.
This is an area where installment loans have an advantage. Despite their larger loan amounts, their longer payment terms and lower APRs mean that the individual payment amounts are smaller and more manageable.
APRs and interest rates are always important factors when you’re considering a bad credit loan. But don’t forget to check the size of your payments as well. Even a great interest rate isn’t worth it if the individual payments are going to be more than you can afford.
Benefit: Amortizing interest.
While we’re on the subject of interest, let’s talk about amortization. You might not be familiar with that term, but it’s an area where installment loans have a big leg up on their short-term competition.
With an amortizing loan, your interest accrues over time, and every payment you make goes towards both the principal loan amount and the interest owed. Loans that aren’t amortizing, on the other hand, charge interest as a flat fee.
Most installment loans are amortizing, but you should always check to make sure—especially when borrowing from bad credit lenders. With an amortizing loan, paying the loan off early saves you money because less interest accrues—though you should also check to make sure your installment loan doesn’t come with any prepayment penalties.
Payday loans aren’t amortizing, which means that interest is charged as a flat rate right when the loan is issued. Paying back a two-week payday loan in only one week won’t save you anything.
But one of the primary ways that amortizing loans benefit borrowers is by ensuring that every payment gets the borrower closer towards paying the loan off altogether. It’s the opposite of loan rollover, where every payment only goes towards interest, never the principal.
Drawback: No credit checks vs. soft credit checks
This is an issue with all no credit check loans, not just no credit check installment loans.
Lenders that don’t do any sort of check on your credit history or your ability to repay are probably not lenders you should be dealing with. No due diligence of any sort is a sign that they might be banking on their customers falling into a predatory debt cycle.
But not all bad credit lenders are like that. Some lenders, including OppLoans, care deeply about their customers’ ability to repay the loans they borrow. (Shocking, right?)
These lenders will not only check your ability to repay your loan, but they’ll also run what’s called a soft check on your credit. This is a check that returns less information than a full (or hard) credit check, but that doesn’t get recorded on your credit report or affect your score in any way.
The reason that people turn to no credit check loans is that they have no other options—and because there’s no use in having a credit check ding your score when you know that you’re going to get denied anyway.
But that doesn’t mean that you should stick with any old lender, no matter what kind of loan you’re taking out. Find a lender that offers amortizing interest and checks your ability to repay—especially if they perform a soft credit check. You won’t regret it.
To learn more about borrowing money when you have bad credit, check out these related posts from OppLoans:
- 5 Personal Loans With Easy Approval (And Why That Can Be a Bad Thing)
- “Uh-Oh, I Need Money Now!” 4 Fast Cash Options for People With Bad Credit
- No Credit Card? Here Are 6 Ways You Can Still Fix Your Credit Score
- Here’s Why College Students Should Avoid Payday Loans