Lenders evaluate a number of details to determine your eligibility for a loan: your employment history, debt-to-income ratio, and so on. But, one of the key factors needed to qualify for most loans is a credit score — and a good one, at that.
Unfortunately, it takes months, even years, to develop good credit, and not every borrower has time to wait. In these circumstances, individuals may stumble upon an attractive alternative: no-credit-check loans. These are exactly as they sound — not only is good or even fair credit unnecessary to qualify, but you don’t need a credit score at all…
Still waiting for the catch? You’re right to be suspicious. Here’s why no-credit-check loans aren’t the hero they claim to be.
What’s Ahead:
What are no-credit-check loans?
No-credit-check loans come in many shapes and sizes. Spoiler alert: none of them are good.
These personal loans generally offer short repayment periods — anywhere from a couple of weeks to six months or even a year. Instead of checking your credit history to evaluate your risk and reliability as a borrower, these lenders consider other factors, such as your income level and current debts.
Read more: How credit works: understand the credit history reporting system
However, even with this information, no-credit-check lenders accept a great deal of risk when they loan money to a borrower with no credit, and to compensate for that risk, loans come with exceptionally high rates. With a good credit score (around 700), your interest rate may be 14% APR, while for poor credit (580), you might pay upwards of 30% APR. But for no credit at all, interest rates can soar to 400% APR or more!
Types of loans that don’t require a credit check
There are a number of reputable personal loan providers that extend funds to borrowers with bad credit, but the lenders that promise quick cash and no credit check are likely masquerading as knights in shining armor.
Here are three common loan types that don’t require a credit check to meet eligibility requirements — but may come back to bite you later.
Payday loans
Payday lenders go by another name: predatory lenders.
These loans are generally capped at $500 and often charge a finance fee of around 15%. Sound okay so far? That’s the point.
First of all, the 15% “finance fee” is really $15 for every $100 borrowed. So while 15% APR should translate to just $6.25 for a $500, four-week loan, a 15% “finance fee” builds to $60 — nearly 10 times the amount!
Furthermore, the terms offered by payday lenders are especially short, as little as two weeks, because lenders expect to reclaim their money when a borrower receives their next paycheck (on payday). If, however, sufficient funds are not available in your bank account, payday lenders charge rollover fees and late fees. And if they make multiple, unsuccessful attempts to withdraw funds, you’ll pay for overdraft charges too.
Read more: What is a payday loan and why is it a REALLY bad idea to get one?
Car title loans
While payday lenders pull funds from your next paycheck, car/auto title lenders take it from your car.
Instead of requesting a credit check, a car title lender uses your vehicle as collateral for the loan. After evaluating the condition of your car, they may offer you a short-term loan (generally 30 days) for as much as 25%-50% of its value.
Like payday loans, car title loans include excessive interest — around 25% per month, or 300% annually — and substantial fees, including origination fees, key fees, and more. If your debt becomes unmanageable and you eventually default, you’ll forfeit the title and lose your car.
Pawn shop loans
Pawn shop lenders operate similarly to car title lenders, but, of course, their definition of “collateral” is much broader.
In exchange for your vintage jewelry or high-end guitar, a pawn shop offers cash, generally 25% to 60% of your item’s value. According to the National Pawnbrokers Association, these loans are small-dollar, averaging around $150.
Typically, you’ll have a few months to repay the loan, along with interest, after which you can reclaim your item. If, however, you default on the loan, you’ll lose your expensive, rare, or perhaps even sentimental possession.
What do you need to qualify for a no-credit-check loan?
While traditional lenders pull a potential borrower’s credit report to evaluate their reliability, no-credit-check lenders consider a variety of other details, such as your income and debt history.
Here are a few of the most common factors no-credit-check lenders assess to determine a borrower’s eligibility:
- Income.
- Employment history.
- Repayment history (lenders may request this from your bank).
- Debt-to-income ratio.
- Assets (used as collateral to secure a loan).
Beware: some no-credit-check loans are scams!
Individuals seriously considering no-credit-check loans can feel as though they’re out of options, and scammers have capitalized on this reality, pouncing on weary borrowers desperate for cash.
Fortunately, there are several ways to distinguish between legitimate lenders and skeevy scammers, including the following:
- If you’re ever asked to make some type of payment upfront, such as a prepaid credit card, consider it a red flag.
- If the website is not secure — the URL doesn’t start with “https://” — do not offer your personal information.
- If the “lender” does not disclose fees upfront, walk away.
- If you hear the word “guarantee,” it’s too good to be true.
- If the “lender” does not seem interested in your repayment history, that information is clearly not relevant to their “business model.” Borrower, beware!
When you need cash fast, it’s easy to overlook the fine print and pay for it later (literally). With this said, if you are considering a no-credit-check loan, be sure to do your homework. In addition to searching for red flags like those mentioned above, make sure the lender is a registered business in your state and check out any listed physical addresses on Google Maps.
If you’ve fallen prey to a scammer already, collect any and all correspondence and report the incident to your local law enforcement officials. In some cases, you may want to contact the Better Business Bureau and Federal Trade Commission as well.
Why you should stick with a loan that checks your credit
At the end of the day, no-credit-check loans are really a gamble, and the odds are not in your favor. On the other hand, lenders that check your credit history do so for their benefit as well as your own. After all, the success of their business relies on the integrity of borrowers like you.
With this said, it’s always best to work with a lender that checks your credit, and there are a number of free services where you can research and compare rates and terms from reputable providers. For example, Monevo is an online marketplace designed exclusively for individuals seeking personal loans. In less than a minute, you can receive personalized loan offers from more than 30 top lenders.
While you don’t necessarily need a credit score to use Monevo, the site typically evaluates a borrower’s credit history to provide personalized quotes. Fortunately, they’ll only conduct a soft pull on your credit report, which means your score won’t be affected by the process.
Read more: Soft pull vs. hard pull – how each affects your credit
Alternatives to no-credit-check loans
If you need to borrow cash but have poor credit (or don’t have a credit score at all), there are some safe alternative options.
Apply for a secured personal loan
Unsecured loans rely on an individual’s creditworthiness to determine eligibility, but secured loans use your assets as collateral.
Technically, pawn shop loans and car title loans are also secured loans, since they require collateral; however, the interest rates attached to these loan options are generally much higher than some other personal secured loans. Secured loans may use your vehicle or mortgage as collateral, or they may be backed by a savings account or a certificate of deposit.
Read more: Best personal loans for bad credit
Request the help of a co-signer
When a lender offers cash to a borrower with no credit, they accept a great deal of risk; however, if you have a family member or friend who has good credit and trusts you, they could become a co-signer on your loan.
A co-signer can mitigate some risk for the lender and may also help the borrower obtain more favorable terms. Although, if you pursue this option, proceed with caution. If you miss a payment or your loan becomes delinquent, your co-signer’s credit would be seriously damaged. Consequently, this type of arrangement can be harmful financially as well as relationally, so be sure to consider the stakes before you move forward.
Read more: What does being a co-signer really mean?
Ask your credit union about payday alternative loans (PAL)
If you are a member of a federal credit union, you may be eligible for a payday alternative loan (PAL).
Like payday loans, PALs are generally short-term, one to six months, and small-dollar, typically between $200 and $1,000. In 2019, the National Credit Union Administration (NCUA) introduced a second type of payday alternative loans, called PALs II, which extends available terms up to one year and loan amounts up to $2,000. However, both PALs I and II differ from payday loans in a couple of significant ways.
First of all, while interest rates on payday loans can soar up to 400% or more, PALs are capped at 28%. Additionally, payday loan borrowers can find themselves in a repeated “rollover” pattern, resulting in mounting fees and debt; credit unions, however, can not roll over PALs “unless the extension does not result in any additional fees or involve an extension of additional credit.”
PALs are available for individuals who have been a member of a federal credit union for at least one month, so they may be worth considering even if you are not currently a member.
Read more: The best credit unions that may make you want to abandon your bank
Borrow from your 401(k)
A final alternative to no-credit-check loans may be via your retirement savings.
With this option, there is no effect on your credit, because you’re essentially borrowing from yourself. You can pull as much as $50,000 from your retirement savings and typically have five years to repay the amount.
However, there are certain risks affiliated with 401(k) loans, including a 10% default penalty for borrowers who miss payments. Furthermore, since repayments are typically pulled from your paycheck, if a borrower’s employment is terminated a provider can require full repayment on the loan in just 90 days.
Read more: How to take out a 401(k) loan — and why you shouldn’t
In general, 401(k) loans are only viable when you need to finance a large purchase, such as a home or vehicle. Some individuals may be better off temporarily pausing contributions or seeking a hardship withdrawal instead. Additionally, not all 401(k) plans will allow you to borrow from your retirement, so be sure to review documents from your provider thoroughly and talk with your provider about the next steps.
What steps can you take to build credit fast?
Get a secured credit card
Secured credit cards are an excellent means of building credit for those with poor scores as well as no credit history at all.
Like secured loans, secured credit cards rely on some form of “collateral” to reduce risk. Consequently, to receive a secured credit card, users are required to pay some cash upfront, in the form of a refundable security deposit. This deposit acts as a last resort should you repeatedly miss payments.
Beyond the security deposit, however, secured credit cards are quite similar to unsecured credit cards, including the fact that both report your payment history to the three main credit bureaus, so you can build your score.
Read more: Best secured credit cards
The OpenSky® Secured Visa® Credit Card is a perfect choice for a secured card because it requires no credit check. Instead, you pick your credit line and pay a deposit to secure it.
When you make on-time monthly payments, OpenSky® Secured Visa® Credit Card will report that to all three credit bureaus so you can start building credit right away. You may even be eligible for a credit line increase after six months.
And while the OpenSky® Secured Visa® Credit Card doesn’t offer much in the way of cash back, the point of the card is to build credit, and it definitely provides that opportunity. OpenSky® Secured Visa® Credit Card offers you tips on the best way to build your credit, plus stories from real OpenSky® Secured Visa® Credit Card customers on what they’re doing to improve their score.
Become an authorized user
Another way to begin building credit is to become an authorized user on another cardholder’s account.
As an authorized user, you essentially share credit with another individual and receive access to their line of credit. However, you’ll also share penalties; if, for instance, you make a late payment, the main cardholder is responsible for any interest charges incurred and their credit history will be damaged in the process.
Before you request to be added to another cardholder’s account, consider and discuss any potential areas of conflict that may arise. Furthermore, be sure to confirm that the card issuer reports authorized user activity to all three of the major credit bureaus. If they don’t, your credit won’t be affected.
Read more: Can being an authorized user on someone else’s credit card help you build credit?
Pay bills on time
Whether you open a secured credit card or become an authorized user, be sure to always pay your bills on time and in full. This is perhaps the best way to maintain a healthy credit score and increase your score over time, especially since payment history accounts for 35% of your overall credit rating!
In the same way, failing to follow this tip will damage your credit history, and perhaps another cardholder’s if you become an authorized user. In fact, one missed payment can cut 100 points from your overall score, a blemish that sits on your credit report for seven years, impacting your eligibility and options for future financial opportunities.
Read more: Why it takes 7 years to establish good credit
Summary
No-credit-check loans certainly don’t produce identical results for every borrower. For some folks, these loans fulfill a need for immediate funds, and the transaction begins and ends in a matter of weeks. The norm, however, is typically quite the opposite, often leading borrowers into deep, unmanageable debt.
Before you pursue a no-credit-check loan, it’s best to exhaust all other options first. Take advantage of a service like Credible to compare competitive rates and terms for loans from a number of top providers.
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