When you need money fast and have damaged credit, ads for no-credit-check loans can be tempting. They may seem like the perfect solution to your financial problems, but no-credit-check loans are very expensive and can leave you in a worse position than you started.
Here’s why no-credit-check loans are dangerous, and several better types of personal loans and options you can use if you need cash.
What Is a No-credit-check Loan?
A no-credit-check loan is exactly what it sounds like. It’s often a guaranteed loan that offers instant approvals without a credit check requirement. Most personal loan requirements include a credit check, income verification and other criteria so lenders can see how well you’ve managed past debt. They then use this information to help qualify you for a loan and establish your interest rate.
No-credit-check loans, on the other hand, are given out based on your ability to repay the loan. For instance, lenders can check your bank account statements or past pay stubs to see how much you earn with each paycheck and how much loan you can afford.
Some no-credit-check lenders also require you to pledge collateral—a personal asset you use to secure a loan and one the lender can repossess if you fail to meet the repayment terms. For example, you might need to leave something of value with a pawnshop to get a pawnshop loan. You’ll then get your item back when you repay the loan. Auto title loans are another type of no-credit-check loan where you’ll leave your car’s title (and possibly even a set of keys) with the lender until you pay off the loan.
Why No-credit-check Loans Are Dangerous
No-credit-check loans aren’t as common as traditional loans; however, you can still apply for one through various institutions, including:
- Payday loan stores. This is what most people think of when they hear no-credit-check personal loan. Payday loans generally last until your next paycheck, charge extremely high interest rates and offer you the ability to roll your current loan into a new one if you can’t pay (for an even higher price, of course).
- Auto title lenders. Lenders who trade you an expensive loan for your car’s title can be found online, or they may have storefronts in your community.
- Online lenders. Some online lenders don’t specifically offer payday loans or auto title loans, but they still offer no-credit-check loans.
- Pawn shops. Pawn shops sell items, and they give out short-term pawn loans too. They’ll usually give you a ticket with your cash, which you’ll need when you repay the loan in order to get your pawned item back.
Why No-credit-check Personal Loans Are Dangerous
Although no-credit-check personal loans are convenient, they can hold you back or even be dangerous in some cases. Here are four things you should know before applying for one.
1. They’re Extremely Expensive
If you don’t have great credit, you’ll have to pay more for any loan than someone with better credit, unfortunately. If you’re comparing no-credit-check loans with regular loans for bad credit, though, it’s a difference of whether you want a high rate, or a sky-high rate.
Many emergency loans for bad credit charge APRs that reach as high as 36%. With payday loans, for example, you’ll often be charged around 400% APR—over 10 times as high. Those numbers can seem abstract, so it’s helpful to see what it actually means for your wallet at the end of the day. Here are what three different $500 loans will cost if you pay them back over a six-month period:
| Type of loan | Example APR | Example monthly payment | Example total interest paid |
|---|---|---|---|
|
No-credit-check personal loan
|
400%
|
$202.75
|
$716.51
|
|
Regular personal loan with bad credit
|
30%
|
$90.77
|
$44.65
|
|
Regular personal loan with good credit
|
7%
|
$85.04
|
$10.26
|
The difference between having good credit and relying on payday loans in this case is $706.25 more in interest—more than you even borrowed in the first place. It’s high costs like these that many people consider criminal, which is why some states prohibit payday loans.
Because payday loans only last until your next payday, term lengths are generally about two weeks, not six months. However, there are cases where you can end up paying that high APR for even longer (even six months or more as in the above example), which brings us to our next point.
2. They Can Trap You In Debt
Payday loan lenders know these loans are expensive, and that there’s a chance you won’t be able to pay them off. So they offer a handy trick: If you can’t pay your loan back, you can roll it up into a new loan, so you’ll essentially get an extension for an additional fee.
This means you’ll have an even bigger hurdle to clear next time. And if you weren’t able to pay it off the first time, it’s even less likely you’ll be able to two weeks down the road when it’s a larger balance. According to the Federal Reserve Bank of St. Louis, 91% of payday loan borrowers can’t repay their loan balances when the time comes.
3. They Don’t Build Credit
Another way that payday loans and other no-credit-check loans trap you into a debt cycle is that they don’t help you build credit. Since they don’t check your credit, they generally don’t report your payments (even on-time ones) to the credit bureaus.
Since you’re not building credit, this means that you’re more likely to have to rely on no-credit-check lenders going forward, too. It’s another way they make you more reliant on them, versus being able to apply for a personal loan that you can pay off more easily in the future.
4. They’re More Likely To Be Scams
Not all no-credit-check loans are scams—or at least true scams, in the sense that they rob you of your money right away. But, since people who rely on no-credit-check loans are often more desperate in the first place, they’re commonly targeted by thieves advertising these products.
To avoid a personal loan scam, it’s a good idea to never send someone any money before you receive yours. Thieves using these scams also commonly ask for unusual forms of payment, as opposed to using collateral, before they grant you a loan, such as a prepaid debit card. And if you think you’ve been a victim of a scam, there are ways to protect yourself or resolve it.
Alternatives to No-credit-check loans
Lenders that offer no-credit-check loans earn their living by hoping you don’t do your research to find other options. However, you’re never pinned in, and you do have other choices, including:
- Saving up and building credit. This isn’t a choice for everyone, but if you don’t need the money immediately, it’s better to save up and build your credit first. Not all credit-building options take a long time, and by saving, you can earn interest instead of paying it to someone else.
- Seeking help from a charity. If you’re having trouble paying your bills, you don’t have to resort to a no-credit-check loan. There are a lot of options around the country that can help, and you can use 211.org to get connected to them.
- Getting help from a credit counselor. The nonprofit National Foundation for Credit Counseling is another resource that offers assistance from a live counselor in helping to find a solution for your financial and credit problems. This is a low-cost, or even free, service.
- Utilizing payday loan alternatives. Many credit unions offer payday loan alternatives, which are short-term loans for a small amount of money but at an affordable rate. You’ll need to join a credit union to be eligible to apply, so check to see if any credit unions in your community offer this option first.
- Applying for secured personal loans. Although title loans and payday loans are technically secured, you can usually find secured personal loans from other lenders at cheaper rates. The best unemployment emergency loans can also be a good option for borrowers who are between jobs.
- Finding a co-signer. If you have a friend or family member with better credit and who trusts you, you can consider asking them to co-sign on your loan for you.
