Most lenders check your credit history when you apply for a loan. If you have a record of making payments on time and aren’t using most of your available credit, you’re more likely to be approved for mortgages and other types of loans. You’ll also qualify for better interest rates than people with a poor credit history.
If you have bad credit or haven’t yet developed a credit history, however, you may be able to qualify for a no credit check loan. Read on to learn more about the advantages and disadvantages of these types of loans.
Benefits of No Credit Check Loans
If you have an emergency, such as a medical problem or car repair that requires quick cash, a no credit check loan might seem like a helpful option. Many of these loans offer the fast approval and immediate funds transfer you need to solve the issue at hand. Generally, no credit check loans are for between $50 and $1,000.
However, it’s important to be aware of the terms of your loan as well as the interest rate. Read all paperwork carefully before agreeing to this type of loan.
Reasons to Avoid No Credit Check Loans
Some no credit check loans carry a super high-interest rate, often above 100%. These type of bad credit loans, often called payday loans, are known for locking the borrower into a cycle of high-interest loans that the borrower can’t repay.
Some states have capped the interest rate for no credit check loans at 36%.
If you choose this route, avoid predatory lenders that charge high rates and encourage you to take a second loan to repay the first. And don’t give a lender direct access to your bank account to withdraw monthly payments.
Even if you’re able to make timely payments on your no credit check loan, these types of loans don’t report to the three credit bureaus. That means that paying as agreed won’t boost your credit score. In contrast, paying as agreed on a traditional bank personal loan will help you improve your credit, because most banks report to at least one if not all three credit bureaus.
The Consumer Financial Protection Bureau reports that even though no credit check loans don’t help your credit score, they can hurt your score if you fail to pay. That’s because the lender can sell the debt to a collection agency, which would, in turn, report your delinquency to the credit bureaus.
Loan Options for Poor Credit
If you don’t have the credit score to qualify for a traditional loan and are reluctant to take a no credit check loan with a high interest rate, you do have options. Some of the best routes to explore include:
- Credit unions often have more relaxed credit guidelines than traditional banks and lenders. They also typically offer short-term loans of $500 or more with reasonable interest rates that you can actually afford to pay back. Loans from federal credit unions are capped at an 18% maximum interest rate. In some cases, you’ll even be able to customize the payment terms of a loan from a credit union.
- Collateral loans are available if you own something of value, such as a car. With this type of loan, the lender holds the title to the vehicle until the loan is repaid. However, if you don’t pay as agreed, your car could be repossessed. This option should be limited to situations when you have the projected cash flow to pay the loan back quickly. This type of loan is sometimes called a secured loan.
- Many online lenders offer personal loans of up to $5,000 to borrowers with credit scores below 600. Although your credit will be checked for this type of loan, most lenders will do a so-called soft pull. That means the inquiry won’t affect your credit score.
- A friend or family member with a good credit history may be willing to cosign your loan. This means that if you don’t repay the loan as agreed, that person is responsible for the debt. It’s important to have a plan to pay off the loan if a loved one trusts you enough to cosign for you. This will allow you to qualify for a reasonable interest rate and improve your credit over time.
- If you already have a credit card, taking a cash advance can be costly but is typically less expensive than the cost of a payday loan. You can also consider applying for a new credit card. Although this will require a hard credit check, some cards are available to those with bad credit scores.
Getting Approved for a Loan with Bad Credit
Improving your credit expand your options when it comes to loan approval. You’ll also be able to qualify for lower interest rates and more favorable repayment terms. Here are some steps you can take to improve your credit:
- Pay your bills on time and in full each month. This will also improve your financial situation by helping you avoid late fees and interest payments.
- Check your credit report and make sure the information is accurate. You can get a free annual copy of your report from each of the three credit bureaus. You’re also eligible for a copy if you get denied for credit. Dispute any negative items that are incorrect.
- Keep your total revolving debt at less than 30% of your total available credit card balance. The more of your available credit you use, the higher of a risk you pose to lenders.
- Keep old credit card and loan accounts open. Part of your credit score is determined by the age of your credit history and your debt utilization ratio. Closing those old accounts can lower raise your ratio and actually hurt your score.
- Pay up-to-date accounts that are listed as past due on your credit report but aren’t yet listed as “charged off.” The latter term means that you haven’t paid in more than 180 days. Accounts that are charged off can severely damage your credit score. However, you can prevent this from happening by paying the past-due amount.
- Attempt to settle accounts that have already been charged off or that have been sent to collections. You can contact the lender or the collection agency and request to settle the account for a portion of what you owe. In some cases, the company will agree to remove the charge-off from your credit report.
- Open a new credit card, which increases the amount of credit you have available and lower your total credit utilization. Remember to be strategic about applying for new accounts though. Too many inquiries at once can drop your credit score. And don’t use the new card much, if at all to keep your credit utilization ratio as low as possible.
- Be patient. If you continue to make smart, well-informed financial decisions, your credit score will improve over time.
The resources on Credit.com have a lot of information on how you can work on improving your credit. Compare financial products to find the right credit card or personal loan for your needs and monitor your credit with the free score and credit report card on Credit.com so you can work on any issues that might be lowering your score.