Borrowing money isn’t out of the question when you have poor credit – but no-credit-check loans are expensive and can trap you in a cycle of debt. ( iStock )
If you need money for an unexpected expense but your credit isn’t good enough to qualify for a traditional loan, you might think a no-credit-check loan is a good idea. While borrowing money isn’t out of the question when you have a bad credit history, no-credit-check products come with exorbitant fees and should only be considered as a last resort.
Let’s examine how no-credit-check loans work, why you should avoid them, and some borrowing alternatives when you have poor or little credit history.
What are no-credit-check loans?
With a no-credit-check loan, the lender doesn’t check your credit report and score before deciding to give you a loan. To make up for the risk that comes with lending money to borrowers with potentially poor credit histories, no-credit-check loan lenders charge high interest rates and fees.
You may come across a few different types of no-credit-check loans, such as payday loan, title loans, and personal installment loans.
Why do lenders check your credit?
Your credit report and score help lenders understand how you’ve managed credit in the past, and estimate how likely you are to repay a new loan. Because of this, it’s common to undergo a credit check when you complete a loan application. Lenders aren’t looking for a perfect credit report, but they do look for histories of missed payments, debt in collections, or a bunch of recent credit inquiries. Having a lower credit score can affect the types of rates and terms you’re offered and can even disqualify you from getting a loan.
If you need a loan, Credible lets you compare personal loan rates to see what you may be eligible for.
Most reputable personal loan lenders will look at your credit before agreeing to give you a loan. The types of lenders who won’t check your credit before issuing you a loan often include payday lender stores, title loan stores, pawn shops, and online lenders.
To make up for skipping a credit check, these lenders usually charge high interest rates and fees. Even if you don’t have to undergo a credit check, you’ll still need to prove your identity and any sources of income.
Keep in mind that most no-credit-check lenders make no effort to ensure you’ll be financially capable of repaying your loan on time. This is how a few different no-credit-check loans work.
- Payday loans – After being approved for this small, short-term loan, you’ll receive your funds in the form of cash, a check, or a direct deposit into your bank account. You have to pay back your loan – plus any fees or finance charges – by the due date, which is typically by your next paycheck, or within 14 days. The finance charge is usually based on the loan amount, and payday loans come with fees that equate to an APR of 400% or more, according to the Consumer Financial Protection Bureau. To apply for one, you’ll likely only need to share your identification, have a bank account, and prove that you have a steady paycheck.
- Title loans – With a car-title loan, instead of undergoing a credit check, you’ll use your vehicle title as a form of collateral to give the lender some reassurance that you’ll repay your loan. You can apply for a title loan at a title lender’s physical or online store. Title loans typically range from 25% to 50% of the car’s value. To qualify, you have to own the car in full – it can’t be currently financed through a lender. You’ll need to bring your vehicle, the title, a photo ID, and proof of insurance to the title loan store to receive the loan. Be careful here – once you’ve signed the contract, you need to pay the loan fees and interest in full, as the lender gets to keep your car title until you pay off your debt. You also risk the lender repossessing your car if you don’t pay your loan back on time. In many states, title loans are actually illegal.