Getting a personal loan with bad credit can be tough. Lenders and creditors usually require a credit check before you can borrow money, and if you have poor credit or no credit, you may be denied.
You might wonder if you can get a personal loan with no credit check. It’s possible, but you may want to think twice, because it can cost you more in the long run. Here’s what you should know about no-credit-check loans.
[Read: Best Personal Loans.]
What Is a No-Credit-Check Loan?
A no-credit-check loan is a type of loan where the lender doesn’t perform a comprehensive review of your credit history or credit score as part of the approval process.
This is contrary to the norm, as your credit is usually a key metric that lenders consider when deciding whether or not to approve you as a borrower. The higher your credit score, the more likely that you will be approved for a loan, and the better the terms will be. The opposite is also true.
“Your credit rating is the best predictor of whether you will or will not pay your future debts as agreed,” says Todd Christensen, education manager for Money Fit by DRS, a nonprofit debt relief agency.
Most lenders require that you meet a certain credit score threshold to take out a personal loan. That score differs for each lender, but in general, it should at least be in the fair range.
A credit score of 580 to 669 is fair, according to credit bureau Experian. Good scores range from 670 to 739, and 740 or higher is very good to exceptional.
In most cases, you need a credit score of 620 or higher to pass a credit check and qualify for a personal loan.
Any lender that doesn’t consider your credit rating as part of the qualification process is taking on increased risk by lending to you. But there is an upside for the lender: “The higher the risk the lender takes, the more they will be rewarded through higher interest rates,” Christensen says.
[Read: Best Personal Loans.]
Is it Possible to Find a Good Personal Loan Without a Credit Check?
You’re not likely to find a traditional personal loan without a credit check. Most reputable personal loan companies require a credit check when you submit your application.
“A true ‘no-credit-check’ personal loan is very uncommon and should be regarded with suspicion,” says Zach Robbins, founder of Loanfolk, a financial education website. “Although there has been a lot of innovation in the past five years around how lenders assess risk and borrower profiles, credit scores remain a core decision component for virtually every reputable lender.”
Still, you can get alternative installment loans, which are similar to personal loans and can be obtained without a credit check. As with a personal loan, you will get a lump sum that you pay back according to a repayment schedule.
But costs are higher, qualification requirements are different, and loan amounts are smaller than traditional personal loans.
This type of loan is an alternative to payday or title loans, which are usually available without a credit check at a high cost. You may pay a fee to renew or roll over a payday loan and delay repayment.
Alternative installment loans may charge annual percentage rates in the triple digits, sometimes well over 400%. Instead of checking your credit, lenders may assess your employment, income and bank account.
Are No-Credit-Check Loans Risky?
No-credit-check personal loans involve quite a bit of risk. For one, high APRs mean you’ll pay much more to borrow money than you would with a traditional loan.
If you take out a six-month $1,000 loan with a 200% APR, you will pay $657.19 in interest — more than half the loan amount. You will pay $107.59 if the APR drops to 36%. That’s less costly, but it’s still pricier than home equity or low-interest personal loans would be.
Additionally, scammers may prey on borrowers with bad credit who are desperate for loans. If you don’t spend the time to vet lenders, you could become the victim of a scam or fraud.
“If a borrower comes across an unsecured personal loan offer that truly requires no credit check, they should be very suspicious,” Robbins says. “They should ask themselves how the lender can be sure they are offering a loan to a qualified candidate, and what the lender is going to require instead, potentially in the form of predatory fees or interest.”
[Read: Best Low-Interest Personal Loans]
No-Credit-Check Loan Types
No-credit-check loans come with different names and terms, but they generally have a couple of things in common: high costs and high risk. That said, some no-credit-check loan options are better than others.
— Payday loans: These are short-term loans, typically for small amounts of money. They are designed to cover expenses until your next payday, but they come with very high interest rates and fees. It’s easy to end up trapped in a never-ending cycle of debt with payday loans. In fact, more than four in five payday loans are rolled over, or reborrowed, within a month, according to the Consumer Financial Protection Bureau.
— Title loans: These are secured loans where borrowers use their vehicle title as collateral. If the borrower fails to repay the loan, the lender can seize the vehicle. Title loans also tend to have high interest rates.
— Payday advance apps: Some companies offer cash advances, which are short-term loans against the borrower’s next paycheck. They can be acquired through payday loan companies or, in some cases, through credit card providers as cash advance loans.
— Pawnshop loans: These are secured loans where the borrower pawns an item of value and then the pawnshop holds the item until the loan, plus interest and fees, is repaid. The interest rates can be high, and if the loan isn’t repaid, the pawnshop keeps the item.
— Peer-to-peer loans: Some peer-to-peer lending platforms may offer loans without a traditional credit check by connecting borrowers directly with individual lenders. However, the terms and interest rates can vary significantly.
Alternatives to Getting a Loan Without a Credit Check
If you’re considering a no-credit-check loan, first explore other options. You may be able to qualify for less risky financing, even with poor credit.
Consider Bad Credit Personal Loans
Don’t assume you’ll be denied credit if the application involves a credit check. Some reputable lenders offer loans to consumers with fair or poor credit. Lenders may evaluate your ability to repay based on your credit and factors such as your education, income and bank account balance.
Pledge Collateral
You can try to apply for a secured loan if you were denied a traditional unsecured personal loan.
Although you will need a credit check, you can bolster your credit score with a loan secured by an asset such as a car, home or bank account. Of course, secured loans can present more risk to you, as your collateral could be seized if you can’t repay the loan.
But if you’re confident in your ability to make payments, a secured personal loan is usually easier to qualify for and comes with lower interest rates than an unsecured loan.
Clean Up Your Credit
If you don’t need money right away, you can take some time to improve your credit. When you are denied a loan because of poor credit, you are entitled to an explanation from the lender as well as a free credit report.
You can also get a free copy of your credit report from each of the three credit bureaus once a week at AnnualCreditReport.com. “The borrower needs to verify that the entries on the credit report are valid and then take corrective action to remedy any errors or negative notations,” says Salvador Gonzalez, a contributing faculty member in accounting for Walden University.
Use a Buy Now, Pay Later Service
Buy now, pay later companies allow consumers to make purchases online and split the total cost into installment payments over a few weeks, typically without interest if paid within a specified timeframe. BNPL options have become increasingly popular as an alternative to traditional credit-based payment methods.
Ask a Friend or Family Member for Help
If qualifying for a traditional personal loan on your own isn’t in the cards right now, you could consider applying with a trusted co-signer. But proceed with caution.
Although you are the primary borrower, the co-signer is equally responsible for your debt. If you don’t pay, your co-signer’s credit will take a hit, and debt collectors may pursue your co-signer.
Alternatively, you could borrow money from a friend or family member, which would mean little to no interest, depending on your agreement. Yet this arrangement can be just as risky.
Regardless of which type of loan you choose, know what you’re getting into before you borrow.
How to Find the Right Personal Loan
Finding the right personal loan takes some research. It’s important to choose a loan that fits your financial situation and needs. Here’s a step-by-step guide to picking the right personal loan:
— Assess your needs and budget. First, you’ll need to clearly define the purpose of the loan, how much you need to borrow and what you can afford in terms of monthly payments. Then calculate your income and monthly expenses to see whether those monthly loan payments fit your current budget. If not, you may need to adjust your spending or borrow less.
— Check your credit. In most cases, your credit score significantly impacts the interest rate and loan terms you’re offered. Get free copies of your credit reports from the major credit bureaus and check for any errors or negative entries that might affect your score. You may want to spend a few months improving your credit before applying for a loan so you can qualify for better terms.
— Research lenders. When shopping for a loan, it’s a good idea to consider banks, credit unions and online lenders. Evaluate them based on factors such as interest rates, fees, loan terms, loan amounts and prepayment penalties.
— Compare offers. Most major lenders will allow you to get a quote online for free and with only a soft credit inquiry. Be sure to get several quotes and compare them to nail down a loan that fits your needs.
— Read the fine print. Before you submit your application, carefully review the terms and conditions of any loan offer. Look for hidden fees, the flexibility of payment options and what happens in case of late payments.
— Submit an application. Once you’ve chosen a lender, you can complete the application process. Be prepared to share documentation such as proof of income, employment, identification and other financial details.
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Can You Get a Personal Loan With No Credit Check? originally appeared on usnews.com
Update 01/26/24: This story was previously published at an earlier date and has been updated with new information.
