What to Know About No-Credit-Check Loans

No-credit-check loans sound great, but are they? Here's what you need to know before getting one of these loans.

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When you apply for most types of loans, including personal loans, mortgages, and auto loans, lenders typically check your credit.

They do this for one simple reason: Your credit is a good indicator of whether you’re a responsible borrower or not. By assessing your credit score and looking at your credit report, lenders can determine if you’ve paid your debts and if you are likely to pay back future loans.

The problem is, if you have bad or no credit, this credit check could be an obstacle to securing financing when you need it. If you know that your credit isn’t great, you may be tempted by lenders that advertise “no-credit-check loans.” After all, these lenders are promising they’ll give you the money you’re looking for even with an imperfect credit score -- which can sound pretty good when you’re in need of funds that you suspect most lenders will deny you.

The problem is, these no-credit-check loans often have very unfavorable terms for consumers. While you may be able to get a loan, you could be creating a lot of long-term financial trouble for yourself if you actually borrow and try to pay back what you owe.

The problem with no-credit-check loans

When lenders promise not to check your credit, they do so knowing they’re likely to get borrowers who don’t have a strong history of repaying debts. Lenders aren’t in the business of just giving away money to people for the fun of it -- especially when there’s a good chance many borrowers won’t repay the loans they’ve taken out.

Lenders offering no-credit-check loans have typically figured out a way to make money, even in cases where they’re dealing with borrowers who don’t have a good financial track record. Typically, these lenders do this in a few different ways:

  • They charge really high fees and really high interest rates. Payday loans are one common example of loans that typically don’t require a credit check. But, by the time you factor in all the fees and costs payday lenders charge, payday lenders often end up charging an effective annual percentage rate (APR) of 400%.
  • They set up the loans so you’re forced to make payments. Some lenders do this by requiring you to write post-dated checks they’ll cash when payments come due or by requiring you to provide access to your bank account and permission to auto-debit funds. When lenders put you in a position where you’re forced to make payments, you have to deal with the loan. Often times that’s done by taking out another loan and incurring additional fees and costs if you can’t afford to have the payment taken from your account when it’s due.
  • They make the consequences of not paying really high. A common example of this is with car title loans, which are often offered without credit checks. Lenders require you to put your car up as collateral with these loans, so your vehicle could be repossessed if you can’t repay what you owe.

Lenders make sure their interests are taken care of when they offer no-credit-check loans -- and the steps they take to do so often worsen your financial position. You risk overdrafting your account, being forced to take out multiple additional costly loans, paying high interest and fees, and potentially losing your possessions acting as collateral for the loan. It’s just not worth it.

What to watch for with no-credit-check loans

Some lenders that provide financing to borrowers with bad credit, or no credit, are better than others.

In fact, there are online lenders that actually offer loans at relatively reasonable rates to people who haven’t yet had a chance to build credit. Some lenders can do this because they look beyond your credit score and also consider your education and experience.

Most of the lenders that offer reasonable rates, though, don’t specifically market their loans as “no-credit-check loans.” Lenders who use these terms have often chosen them for a reason: To prey upon borrowers who they think are desperate and willing to accept funding even with unfavorable terms.

To find lenders that actually offer reasonable loans to borrowers with imperfect credit, use tools like The Ascent’s guide to personal loans for bad credit borrowers. You can also consider peer-to-peer lenders, which can make it easier to qualify for funding than if you only rely on a bank.

When you search specifically for lenders offering no-credit-check loans or bad credit loans, you also want to read the fine print carefully and make sure you understand loan terms. Some of the key things to look at include:

  • Upfront fees and costs.
  • The annual percentage rate, or APR. This takes fees into account, so is a more accurate measure of the total cost of the loan than just looking at interest rates.
  • Loan qualifying requirements. Steer clear of lenders that require you to write post-dated checks or pledge your car as collateral.
  • Repayment timeline. Many legitimate online personal loan lenders allow repayment over many months, or even several years. Be wary of lenders that expect you to pay back your loan within weeks, as there’s a greater chance you’ll be forced to borrow again.

Make sure to read everything carefully and don’t ever take out a loan you don’t understand or aren’t confident you can repay.

Avoid no-credit-check loans and explore other options instead

It’s imperative you don’t take out a bad credit loan with unfavorable terms just because you need money, as this is likely to trap you in a cycle of debt that makes your overall financial situation worse.

Take the time to shop around, to understand your loan options, and to find a lender that will actually offer you reasonable financing. There are options out there, you just need to know where to look.