When it comes to handling money, few of us can claim a perfect track record. Whether it’s due to a situation out of your control, such as a job loss, or a lapse in judgment, low credit scores happen and can make it difficult to qualify for a personal loan.
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Additionally, when you’re just starting out and haven’t yet established a credit history, you may find it hard to get financing. Since you haven’t yet proven your ability to pay back a loan, lenders can’t assess their risk and might decline a request.
Personal loan options
Whether you have bad credit or no credit, it is possible to get a personal loan without a credit check. One option is a payday loan. With this short-term loan, borrowers get an advance on their paycheck.
Another option is a title loan, which requires that you use the title of your car as collateral for the loan. You must own your vehicle to qualify for a title loan, and you can borrow the value of your car. If you default on repayment, the lender can repossess your car.
Secured credit cards are another option for obtaining a loan without a credit check. These are best for people who haven’t yet established credit. Borrowers are required to provide a security deposit equal to the credit limit.
In addition, some credit unions or online lenders may consider giving money to borrowers who can provide documentation that demonstrates creditworthiness, such as tax returns, employment history and bank statements.
Disadvantages of getting a loan without a credit check
“While it can be tough to get loans with low credit, it is possible, but usually comes at a very high interest rate,” said Amy Shepard, financial planning analyst with Sensible Money, LLC, a financial planning firm.
The amount borrowed for a typical payday loan ranges from $100 to $500, with fees that can be around $15 per $100. That translates to an annual percentage rate (APR) of 391 percent. With title loans, lenders often charge an average of 25 percent per month, with an APR of at least 300 percent, according to the Federal Trade Commission.
In addition, the process of getting a new loan will likely cause your credit score to dip, Shepard said. This isn’t ideal if you’re trying to build your credit.
Making your decision
Before you commit to a loan that doesn’t require a credit check, make sure you’ve exhausted all of your options and that you understand the terms. If the low credit was caused by a one-time mistake or situation, and ongoing debt is not an issue, this approach could be helpful, said Shepard.
“If the low credit is the result of many poor financial decisions and habits, I would not recommend using a loan as an attempt to improve a credit score,” she said. "In these situations, someone really needs to work on building strong, healthy financial habits rather than trying to use a loan as a type of Band-Aid fix.
“Getting a small loan can help improve low credit, but only if it is paid back on time. This attempt at improving a low credit score only works if someone has taken the time and discipline to get a better handle on their budget.”