If you’re not confident about your credit score or history, and perhaps worried about the embarrassment of being denied a loan, you might search for personal loans with no credit check. But that may not be a great solution.
- True “unsecured loans no credit check” don’t exist
- Loans with no credit check always have some security for the lender
- Usually, that security is a post-dated check or your car or auto title
These loans can be very, very expensive and have extremely short terms.
Better option: personal loans for poor credit
Applying for a loan and having your credit checked might make you queasy if you know your credit is not great. But even personal loans for bad credit have much better terms than options with no credit check.
In addition, personal loan interest rates — even for people with bad credit — are usually lower than those of credit cards for people with low credit scores. They come with terms ranging from one to five years with fixed interest rates to make budgeting and repaying easier.
If you borrow $300 for one year at a 36% interest rate, your payment should be $30.14 a month and your total borrowing costs, assuming a 5% setup charge, would be $77.
Most personal loans require a credit check
In many (all?) instances, loans advertised as “personal loans no credit check” are actually payday loans or check advance loans.
These loans have extremely short terms — just two weeks in many cases — and very high interest rates and fees. In fact, this kind of financing is so unaffordable that borrowers renew their loans 10 times on average, incurring a fresh round of fees each time. So if you start with a $300 loan carrying a $50 financing charge, and you roll it over 10 times, you end up owing $850!
These loan providers have leverage to make sure you pay up. For instance, a check advance or payday loan requires you to write the lender a post-dated check. And if it bounces, they often collect a bounced check fee. And your bank may charge an overdraft fee as well.
But it doesn’t end there. The lender may put the check through multiple times, running up charges (typically adding about $70 to your costs each time). Unfortunately, the Consumer Financial Protection Bureau (CFPB) recently rolled back protections that prohibited payday lenders from repeatedly attempting to cash checks without permission from borrowers.
No credit check? Probably not a true, unsecured personal loan
Other times, financing advertised as a personal loan with no credit check is really an auto title loan. The provider can take your car if you don’t repay the balance. Like check advances, auto title loans have extremely short terms (usually 30 days) and sky-high fees and interest rates.
Image courtesy of LA County Dept of Consumer and Small Business Affairs
Like payday loans, most auto title loans are so costly that borrowers end up rolling them over — an average of eight times, according to the non-profit Center for Responsible Lending (CRL).
Many auto title loans install GPS trackers on vehicles so they can easily pick them up if your payment doesn’t materialize. Or they may install devices that disable your car so you can’t start it. That could be dangerous late at night or in unsafe places. According to the CRL, one out of every five car-title borrowers loses their vehicle to repossession.
No credit check can mean high interest rates
The fees for “no credit check” loans can be shocking — for instance, one borrower who wrote a post-dated $390 check to cover a $300 loan for two weeks ended up being charged over $900 with the additional fees tacked on by the lender, a company called AMG. And even without the fees, the interest rate is extremely high.
If it costs you $90 to borrow $300 for two weeks, that’s 781% per year!
Auto title interest rates often hit triple-digits in many states. If you borrow $500 for a month and pay a typical fee of $125, that’s 652% per year. If you renew it eight times, you’ll pay $1,125 in fees to borrow $500 for nine months.
Some states limit interest rates and fees
So-called “personal loans” with no credit check may be potential options in the District of Columbia and states that limit what providers can charge consumers to 36% or less. The map below from the Center for Responsible Lending shows payday loan rates by state.
Better: Get a personal loan with a credit check
If you find yourself in a bind and needing money fast, a personal loan can deliver funds in hours, and it’s a much more responsible way to borrow than with a payday or auto title loan.