Risk to Lenders of No Credit Checks

If you’re going to apply for a no credit check loan, you need to consider all your options and
understand exactly what you’ll be getting yourself into.

If you take just a few minutes to check out the Financial Sense Blog (and you should, we
work hard on it) you’ll see many articles about how you can improve your credit and why
your credit is so important.

And the main reason why your credit score is so important is that it allows you to get better
rates on loans and credit cards. Unless you’re the kind of rich where you use Benjamins as
napkins, you’re going to need to borrow money at some point. So what can you do if you
need a personal loan, but don’t have good credit?

One option you might consider is a no credit check loan. Even though that might sound too
good to be true, they do exist! But they come with a catch. Multiple catches, actually. Let’s
get into it.

Credit check check-in
Before we get into the details of no credit check loans, let’s just go over what a credit
check is. On a basic level, when a potential lender performs a credit check on you, they’re
looking to get a copy of your credit report, which contains information on how you’ve used
credit in the past.

You actually have three credit reports, one each from the three major credit reporting
agencies: Experian, TransUnion, and Equifax. Information across the credit reports can
vary, which means that your credit score can change depending on which report is used to
calculate it. To request a free copy of your credit report, visit
www.AnnualCreditReport.com.

There are two kinds of credit checks: hard credit checks and soft credit checks.

Hard credit
checks show up on your credit report temporarily and will negatively affect your credit
score. Soft credit checks will not. So if you are considering a loan that requires a credit
check, that’s one factor to take into account.

Pro: they don’t require a credit check.

The advantage of no credit check loans is right there in the name. You don’t have to
undergo a credit check to get one, so you could qualify for one even if you can’t pass a
credit check.

As for the negatives … there are quite a few.

Con: they’re more expensive.

“Typically, when a loan calls for no credit check, it attracts individuals who might not have
stellar credit histories,” explained CPA Riley Adams. “As a result, these loans can
sometimes have higher hidden costs in the form of higher fees, interest rates, or onerous
terms which make repaying the loan difficult.

“While advisable to avoid taking out such loans, the reality is a lot of people rely on low
incomes, have little-to-no-savings, and haven’t been able to build a solid credit history to
be attractive to the most advantageous lenders.

Pro: they’re fast and easy.

“A benefit of a no credit check loan is that quite often,” said Adams, “the application and
work required to receive the money are fairly straightforward and easy and the money is
available the same day or next.

“However, as mentioned before, there are likely to be hidden costs in exchange for this
easy access to cash in times of need.”

Con: predatory lenders abound.

Not only do no credit check loans appeal to those have negative credit histories, but
they’re also marketed to those who may not always have the best financial knowledge.

“The problem with these unconventional loans is they are typically marketed to people who
are the least financially sophisticated and capable of understanding and evaluating the
risks that they are taking with these loans,” warned bankruptcy attorney Bradley R. Bailyn.

“Obviously this type of loan presents a higher risk for the lender which is going to translate
into much higher interest and fees for the borrower. There are situations when someone
who can afford the mortgage would take such a loan, but generally, it’s going to be people
who are not qualified for this kind of financing and who are going to end up losing the
down payment which may constitute their entire life savings.”

Con: they could trap you in a debt cycle.

And it can be very hard to undo the damage done by taking on one of these no credit
check loans.

“Taking out a no credit check loan is putting yourself on the fast track to getting trapped in
a debt cycle,” Leslie H. Tayne Esq., Founder and Head Attorney at Tayne Law Group, told
us.

“Because of the extremely high interest rates, you may end up taking out another loan or
paying to extend the length of your current loan. Both of these means you’re paying even
more in interest and getting stuck in a vicious cycle that is incredibly difficult to break out
of.”

Consider all your options.

So what are your options if you don’t have great credit but you’re worried about the
dangers of no credit check loans?

Here are some alternatives Tayne suggested:

“Many smaller community banks and credit unions will offer small personal loans to
customers with poor credit. These will have capped interest rates, which will be much
more reasonable than a no credit check loan.

“Get a cosigner: Rather than opting for a no credit check loan, consider asking a friend or
relative to be a cosigner on a personal loan. However, be sure you recognize the
responsibility of having a cosigner. If you default on the loan, the cosigner is responsible
for repaying the loan.

“If money is very tight, consider negotiating some of your bills. You can talk to your
landlord, cable provider, phone company, etc. about lowering your monthly payment or
extending your due date. It’s very possible that they will say no, but you’ll never know if

you don’t ask. And if they agree to it, it can provide you with some relief for the time being.

“Turn to your emergency fund: Rather than taking out a loan, use your own money if
possible. If the situation is truly a financial crisis, your emergency fund is there for a
reason.

“Improve your credit score: Working to improve your credit score will improve your overall
financial health and help you get approved for a traditional personal loan, should you need
one. The most effective way to improve your score is to make your payments on time and
as completely as possible.”