No-credit-check loans: Why to avoid them and what to do instead

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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.

How do no-credit-check loans work?

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.
Pawn loans — In some cases, pawn loans can be cheaper than payday loans, but you do risk losing the item you pawn or paying a fee to extend your repayment term. Pawn shops accept items as collateral, and in exchange, provide a short-term loan that equates to a certain percentage of the item’s value. If you repay the loan with interest within the repayment period, you’ll get your pawned item back. If you can’t repay the loan, the pawnbroker will try to sell your item for a profit.
Personal installment loans — A personal installment loan is a loan that you pay back in regularly scheduled payments, or installments. You may pay interest with each payment, and once you pay the loan back in full, your account will be closed permanently.

Credible lets you compare personal loan rates from multiple lenders in one place.

Why are no-credit-check loans usually a bad idea?

No-credit-check loans are egregiously expensive. The average two-week payday loan has a fee of $15 per every $100 borrowed, which equates to an APR of almost 400%. A credit card, on the other hand, usually has an APR ranging from 12% to 30%.

Payday loans are considered to be a type of predatory lending because lenders typically make no effort to ensure you can actually repay the loan. So if you’re already struggling financially, one of these loans may actually make your situation worse. Payday lenders don’t take your other financial obligations into account when deciding how much to lend you, which can lead to you biting off more than you can chew.

Some types of no-credit-check loans actually roll over into a new loan unless you pay them in full by a set date. When that happens, interest continues to accrue and you can sink deeper into debt. It can take years to get out of what you thought would be a short-term debt. Some lenders may tack on — and charge you for — other products you don’t need, which can drive the cost of the loan even higher.

What are the risks of a no-credit-check loan?

Because of their high fees and interest rates, repaying a no-credit-check loan can easily go awry. Let’s look at how a payday loan’s sky-high APR can add up compared to using a credit card (which is also considered to be a high-interest form of lending, but is much less expensive than a payday loan) over the course of a 30-day term.

Payday loan

Loan amount: $500
APR: 399%
Repayment term: 30 days
Amount owed: $663.97

Credit card

Loan amount: $500
APR: 36%
Repayment term: 30 days
Amount owed: $514.79

These examples make it easy to see how taking on a payday loan puts you at risk of increasing your debt, worsening your financial situation, dinging your credit further, or — in the case of a title loan — losing some of your property. Of course, it’s worth noting that the credit card is most advantageous when you actually pay off the debt in one statement cycle. If you fail to pay it off within 30 days, interest will continue to accrue on the credit card balance.

Alternatives to no-credit-check loans

No-credit-check loans aren’t the only way to get money when you need it. If you have poor credit, here are a few options that can provide financial support without sky-high fees and interest rates.

Bad credit personal loans

A bad credit loan is a type of personal loan designed for those who have bad credit. You’ll borrow money from a lender and pay it back over a set period of time.

What it costs: Has higher interest rates than traditional personal loans, but better rates than a payday loan

How to get it: Through select personal loan lenders

Who it might be best for: Those who have credit on the lower side

Loan from family or friends

If you have a friend or relative who’s willing to help you out, you may be able to get a loan from them. You can create an official agreement to make the loan more formal and to ensure there’s no confusion.

What it costs: This depends on whether the friend or relative wants to charge you interest or fees. In many cases, a loan from a loved one is interest-free.

How to get it: Ask a friend or relative for financial assistance.

Who it might be best for: Someone who’s reliable and has strong relationships that won’t be damaged by borrowing money

Credit union loan

A payday alternative loan, or PAL, is a type of personal loan that can only be taken out at a credit union. Credit union loans can be easier to apply for, and if you don’t qualify, the credit union may work with you to help you become more eligible for a loan.

What it costs: Credit union loans often cost less than those at for-profit financial institutions.

How to get it: Apply for a personal loan at your credit union (note that you’ll typically need to be a member of the credit union for at least one month before you can be eligible for a loan).

Who it might be best for: Members of credit unions

If you’re looking for an alternative to a no-credit-check loan, compare personal loan rates using Credible.