Lenders that don’t check your credit seem too good to be true. That’s because they are.
Lawmakers have cracked down on the harmful practices of payday lenders and car title lenders in recent years. That’s why many lenders have moved into the business of “installment loans,” which have a longer repayment term.
But the shift to installment loans doesn’t mean lenders have changed their ways, says Diane Standaert, director of state policy at the Center for Responsible Lending, based in North Carolina. In fact, most experts in the field call them “payday installment loans.”
These loans come with exorbitant interest rates, often higher than 200%, and lenders don’t consider a borrower’s ability to repay, she says. A regular paycheck and a bank account are typically enough to qualify — because lenders withdraw payments electronically, relentlessly, long past the point where the borrower might have stopped writing checks if the payments were under his own control.
Consider the math: One lender advertises a $2,600, 18-month loan at 187% interest. That would mean a borrower would repay nearly $8,000 — and that’s far from the worst deal you’ll encounter.
It’s no wonder many borrowers default or roll over into new loans, getting trapped in a cycle of debt for a long time.
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What is a no-credit-check installment loan?
A no-credit-check installment loan lies somewhere between a payday loan and a traditional personal loan from a bank, credit union or online lender.
Unlike a payday loan, which is paid back as a lump sum on the borrower’s next payday, the repayment period for an installment loan is usually spread out over months or years. The loan amounts range from $100 to several thousand dollars and borrowers typically make equal, fixed payments. Credit history is not taken into account, and the loans are usually sold with a promise of same-day or next-day delivery of funds.
In a traditional personal loan, banks or credit unions check your credit and income and lend to you if they believe you can afford to pay them back. Interest rates for these kinds of installment loans are usually capped at 36% or less, a level that state regulators and personal finance experts believe represents the practical upper limit of affordability. Approval may take a few days.
What’s the problem with no-credit-check installment loans?
Borrowers usually have low incomes and limited access to traditional forms of credit, according to studies by the Center for Responsible Lending.
NerdWallet columnist Liz Weston, author of “Your Credit Score,” explains: “These lenders prey on people who are desperate and who don’t believe they have other options. When regulators close in, they move across state lines, open up another website under a different name, or call what they are doing a different type of loan.”
The fact that an installment loan is spread out over a longer period of time and has fixed payments may seem like a good thing, compared with payday loans. But the sky-high interest rate makes them harmful in the long run. (The rates are set high so that the lender profits even if the borrower defaults, as many do.)
“Just because it’s marketed as an installment loan doesn’t mean it’s safe,” Standaert says. “Any loan that carries such high costs and is made on such unaffordable terms puts people in a worse financial situation.”
These installment loans have the same features that make payday loans a no-no: no credit check, no gauge of the ability to repay, and easy access to a borrower’s bank account for automatic withdrawals.
“It might feel like the loan helps today, but you’ll be in a worse position tomorrow,” says Lauren Saunders, associate director at the National Consumer Law Center, a nonprofit advocacy organization.
Some lenders tack on additional products like credit insurance or charge fees that drive up the cost of the loan even more, studies show. In Texas, where these lenders are known as “credit access businesses,” the “CAB fee” on a $1,000 loan from one lender is $1,249, even though its nominal interest rate is just 10%. Expressed as an annual percentage rate to include interest and all fees, as the law requires, that loan weighs in at 429% APR.
The growth of these predatory loans hasn’t gone unnoticed. In 2015, the U.S. Defense Department expanded regulations to cap the interest rate on all such loans at 36% for military members and their families.
Alternatives to no-credit-check installment loans
If you’re in need of cash, you may be able to find alternatives to payday loans or no-credit-check loans by talking to credit counselors, religious organizations and community nonprofits.
Even if your credit is poor, your local credit union may be worth a shot.
Most credit unions offer small-dollar loans of $500 and above, and they are often willing to work with you to make the payments affordable, even if your credit is poor. Many also have starter credit cards or loans to help you build a credit history. The interest rate charged by a federal credit union is capped at 18%.
Online lenders that consider credit also may be an option. Many will lend to borrowers with poor credit, even with scores below 600. Some will weigh factors like your job, education and income in their loan decisions.
Even a 36% interest rate on a personal loan is better for your wallet than a high-interest installment loan.
Consider the following example: Here are the monthly payments and the total cost for a $2,000, two-year loan calculated with a standard amortization schedule. The first two are from lenders that consider credit; the last is from a no-credit-check lender.
|Borrower's credit||APR||Monthly payments||Total payments|
|No credit check required||400%||$667||$16,008|
Break the cycle: Next time, give yourself some options
You’re probably looking for a no-credit-check loan because your credit is poor or you have no place to turn for emergency cash.
If you don’t need cash right away, there are steps you can take to understand and grow your credit score. A higher credit score will help you qualify for better rates and terms from lenders if the need arises again. You start by paying your bills on time and not using all of your available credit.
An emergency fund is also helpful, so that you don’t need to borrow money when something pops up. In the long term, you should try to save three to six months’ worth of expenses, but even $500 in the bank will get you through many small crises.
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