Why avoid them and what to do instead
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Borrowing money is not out of the question when you have poor credit, but loans without a credit check 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 loan without a credit check is a good idea. While it is not out of the question to borrow money when you have a bad credit history, products without a credit check come with outrageous fees and should only be considered as a last resort.
Let’s take a look at how loans without a credit check work, why you should avoid them, and some borrowing alternatives when you have a low or low credit history.
What Are No Credit Check Loans?
With a loan without a credit check, the lender don’t check your credit report and score before deciding to grant yourself a loan. To offset the risk of lending money to borrowers with potentially poor credit histories, lenders without a credit check charge high interest rates and fees.
You may come across different types of loans without a credit check, such as payday loans, title loans, and personal installment loans.
Why Do Lenders Check Your Credit?
Your credit report and score help lenders understand how you have handled your credit in the past and estimate the likelihood of you paying off a new loan. For this reason, it is common to undergo a credit check when completing a loan application. Lenders don’t look for a perfect credit report, but they look for a history of missed payments, debt collection, or a bunch of recent credit inquiries. Have a lower credit score can affect the types of rates and terms offered to you and may even prevent you from getting a loan.
If you need a loan, Credible allows you compare personal loan rates to see what you may be entitled to.
How Do Loans Without Credit Check Work?
Most reputable personal lenders will examine your credit before agreeing to give you a loan. The types of lenders who won’t check your credit before giving you a loan often include payday lender stores, securities lending stores, pawn shops, and online lenders.
To compensate for the omission of a credit check, these lenders typically charge high interest rates and fees. Even if you don’t have to go through a credit check, you will still need to prove your identity and sources of income.
Keep in mind that most lenders without credit checks make no effort to ensure that you will be financially able to pay off your loan on time. This is how a few different loans work without a credit check.
- Payday loans – After being approved for this little one, short term loan, you will receive your funds in the form of cash, a check or a direct deposit into your bank account. You must repay your loan – plus any fees or finance charges – before the due date, which is usually before your next paycheck, or within 14 days. Finance charges are generally based on the loan amount, and payday loans have a fee equivalent to an APR of 400% or more, depending on the Consumer Financial Protection Bureau. To apply for it, all you will probably need to do is share your ID, have a bank account, and prove that you have a regular salary.
- Securities lending – With a car loan, instead of having a credit check, you’ll use your vehicle title deed as collateral to give the lender the assurance that you will repay your loan. You can apply for a title loan in the physical or online store of a securities lender. Title loans generally vary between 25% and 50% of the value of the car. To qualify, you must own the entire car – it cannot currently be financed by a lender. You will need to bring your vehicle, title, photo ID, and proof of insurance to the title lending store to receive the loan. Be careful here: once you sign the contract, you have to pay the loan fees and interest in full, as the lender retains title to your car until you pay off your debt. You also risk the lender repossessing your car if you don’t pay off your loan on time. In many states, securities lending is actually illegal.
- Pawn shops – In some cases, pawn shops can be cheaper than payday loans, but you risk losing the item you are pledging or paying a fee to extend your repayment term. Pawn shops accept items as collateral and in return provide a short-term loan that is equal to a certain percentage of the item’s value. If you repay the loan with interest within the repayment period, you will get your pledged property back. If you cannot repay the loan, the pawnshop will try to sell your item for a profit.
- Personal installment loans – A personal installment loan is a loan that you repay in installments or regular installments. You can pay interest on every payment, and once you’ve paid off the loan in full, your account will be closed for good.
Credible allows you compare personal loan rates from multiple lenders in one place.
Why are Loans Without a Credit Check Usually a Bad Idea?
Loans without a credit check are extremely expensive. The average two-week payday loan has a fee of $ 15 for 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 a predatory type of loan because lenders usually make no effort to ensure that you can actually repay the loan. So, if you are already having financial difficulties, one of these loans can actually make your situation worse. Payday lenders don’t take your other financial obligations into account when deciding how much to lend, which can cause you to munch on more than you can chew.
Some types of loans without a credit check actually turn into a new loan, unless you pay them off in full on a set date. When this happens, interest continues to accumulate and you can take on more debt. It can take years to get out of what you thought was short term debt. Some lenders may add – and charge you for – other products that you don’t need, which can further increase the cost of the loan.
What Are the Risks of a Loan Without a Credit Check?
Due to their high fees and interest rates, paying off a loan without a credit check can easily go wrong. Let’s take a look at how the super high APR of a payday loan can add up to using a credit card (which is also considered a form of high interest rate loan, but much cheaper than a payday loan) with a 30 day term.
- Amount of the loan: $ 500
- APR: 399%
- Repayment period: 30 days
- Amount: $ 663.97
- Amount of the loan: $ 500
- APR: 36%
- Repayment period: 30 days
- Amount: $ 514.79
These examples make it easy to see how taking out a payday loan puts you at risk of increasing your debt, worsening your financial situation, further deteriorating your credit, or, in the case of a title loan, loss of part of your property. Of course, it should be noted that the credit card is more beneficial when you pay off the debt in one statement cycle. If you don’t pay within 30 days, interest will continue to accrue on the credit card balance.
Alternatives to loans without a credit check
Loans without a credit check are not the only way to get money when you need it. If you have poor credit, here are some options that can give you financial support without fees or sky-high interest rates.
Personal loans for bad credit
A bad credit is a type of personal loan designed for those with bad credit. You will borrow money from a lender and pay it back over a set period.
What it costs: Has higher interest rates than traditional personal loans, but better rates than a payday loan
How to get it: Through some personal lenders
Who could it be best for: Those with credit below
Loan from family or friends
If you have a friend or relative who is willing to help you out, you may be able to get a loan from them. You can create a formal agreement to make the loan more formal and avoid confusion.
What it costs: It 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 for financial help from a friend or relative.
Who could it be best for: Someone who is reliable and has a strong relationship that will not be damaged by borrowing money
Credit union loan
An alternative payday loan, or PAL, is a type of personal loan that can only be taken out at a credit union. Credit union loans may be easier to apply for, and if you don’t qualify, the credit union can work with you to help you become more eligible for a loan.
What it costs: Loans from credit unions are often less expensive than those from for-profit financial institutions.
How to get it: Apply for a personal loan from your credit union (note that you will usually need to be a member of the credit union for at least a month before you can be eligible for a loan).
Who could it be best for: Members of credit unions
If you are looking for an alternative to a loan without a credit check, compare personal loan rates using Credible.