What are no-credit loans and how do they work?

Think twice before taking out no-credit-check loans, or you could pay hundreds or even thousands of dollars in fees and interest

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No-credit loans provide funding to borrowers with bad credit, but they come at a steep price. Learn what other options you may have. (Shutterstock)

Many people are facing financial difficulties. As the cost of groceries, gas, and rent increase, your paycheck might not be stretching as far. 

If unexpected expenses crop up but your credit is keeping you from qualifying for a traditional loan, you may be tempted to rely on a no-credit-check loan to get by. While these loans may feel like your only option, they’re expensive and risky — and you should avoid them whenever possible. 

When you have poor credit, it’s still possible to get a loan from a reputable personal loan lender. If you have a lower credit score and need a personal loan, Credible makes it easy to see your prequalified rates from various lenders, all in one place.

What are no-credit-check loans?

No-credit-check loans allow you to obtain funds without the lender accessing your credit report before offering the money. These loans can be attractive to borrowers with bad credit because they’re easier to obtain than traditional loans and they can usually be funded quickly. 

But to make up for the risk of lending to bad credit borrowers, no-credit lenders often charge sky-high fees and interest rates.

How do no-credit-check loans work?

The process for getting a no-credit-check loan can vary depending on the lender. 

Many lenders that offer no-credit-check loans have online applications. You’ll need to fill out personal information (including your income and direct deposit information). The lender will then make an offer. Once you accept the offer and sign closing documents, the lender can deposit the funds into your account.

If you’re applying in person at a brick-and-mortar location, the lender may require a pre-written check or other payment before providing funds.   

Most reputable lenders will run a credit check before lending you money, because they want to make sure you can afford your loan payments. No-credit lenders will offer you funds without considering whether or not you’ll be able to repay the loan.

You should know that lenders who offer no-credit-check-loans without any background information aren’t doing it out of the kindness of their hearts. Most of these loans have very high fees and interest rates.

Types of no-credit loans

Here are some common types of no-credit loans that you may come across. None of them will require a credit check, but they all come with expensive fees and interest in addition to other risks. 

Payday loans

Payday loans are a popular no-credit loan option. With a payday loan, the lender offers you a short-term loan for a small amount, typically no more than $500. Most payday loans are for two weeks, the typical time between pay days. You can provide a post-dated check with the loan balance (and fees); once the due date comes, the lender cashes the check. Some payday lenders also allow direct payments with a debit card. 

While a single payday loan might not break the bank, many payday lenders allow you to roll over the loan or take on additional debt while paying more fees. For example, you may pay a fee of $10 to $30 for every $100 you borrow. If you took out a two-week payday loan with a fee of $15 per $100, this equates to an annual percentage rate (APR) of nearly 400%, according to the Consumer Financial Protection Bureau.

Title loans

A title loan is a secured loan where you turn over the title to your car as collateral. The lender may charge you a fee to borrow money, and you’ll typically have to repay the loan in 30 days. 

Title loans may offer higher funding amounts, but if you fail to repay the loan, the lender can take your vehicle. 

Pawn shop loans

Pawn shop loans are similar to title loans since you must provide collateral. The key difference is that pawn shops will accept almost any valuable item in exchange for a cash loan. The pawn shop will offer a percentage of the resale value of an item (typically between 25% to 60%) as a loan. 

You’ll typically have 30 to 60 days to repay a pawn shop loan. The pawn shop holds onto your item until you come back to repay the loan, but if you can’t repay in time, they can sell your item.

Risks of a no-credit-check loan

While no-credit-check loans may seem alluring, especially when you’re running short on money and your credit score isn’t great, they’re risky. These loans can trap you in a cycle of debt, worsen your financial situation, and ding your credit further if you aren’t able to repay them. You can even lose some of your personal property if you fall behind on loan payments.

Alternatives to no-credit loans

Even if you have bad credit, it’s possible to get approved for a loan that doesn’t come with the risks of a no-credit loan. Here are a few options to consider. 

Online lenders

Many online lenders offer personal loans to borrowers with lower credit scores, and they’re a popular option because they can typically fund loans quickly. While your interest rate will likely be higher than what you’d get with a better credit score, it won’t be as high as rates on no-credit loans. 

Online lenders will check your credit report and credit history when you apply for a loan. Some lenders will consider factors beyond your credit score, like your education, work history, and college major. 

You may also consider asking a friend or family member to cosign your loan. Adding a cosigner with good credit to your application can increase your chances of loan approval and of getting a lower interest rate

Visit Credible to quickly and easily compare personal loan rates from various lenders, without affecting your credit score.

Credit-builder loan

If you want to work on rebuilding your credit, you could apply for a credit-builder loan. This type of loan operates in reverse of a traditional loan. Instead of getting cash up front and making payments after, the lender puts the loan amount into a locked savings account.

You’ll make monthly installment payments, and the lender will report your payments to the credit bureaus. Your payment history is the biggest factor that makes up your credit score, so having a history of on-time payments can boost your score.

Once you’ve paid the loan amount, the lender will give you the balance, plus possible interest. While a credit-builder loan isn’t ideal if you need money right away, it’s a simple way to help build your credit score with lower risk. 

Secured credit card

A secured credit card operates like a traditional credit card, except you must provide an upfront security deposit to get the card. Your credit limit will be equal to your security deposit, and if you don’t make your payments the credit card issuer can keep the money. 

As you make your payments on time, it can help boost your credit score. The credit card issuer may refund your security deposit or increase your credit limit. Many card issuers will upgrade your card to an unsecured account after you’ve successfully made payments for a certain period of time.