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No-Credit-Check Loans: A Very Bad Idea

No-credit-check loans are expensive and can trap you in a cycle of debt. Consider alternative options, no matter how urgent your situation.
February 26, 2018
Loans, Payday Loans, Personal Loans
Personal Loans With No Credit Check: A Very Bad Idea

No matter how dire your need for fast cash, think twice before getting a no-credit-check loan. Why? Because they’re potentially as predatory as payday loans or car-title loans and can trap you in a cycle of debt for years.

These loans — also known as no-credit-check installment loans — come with annual percentage rates reaching upwards of 400% in some cases, far above rates you’ll find at credit unions or with online lenders, two alternative options when you need fast cash.

What’s wrong with no-credit-check loans?

Consider an example: If a lender charges a 400% APR on a two-year, $2,000 loan, you’ll pay $667 monthly to pay it off. That’s more than five times — $549 in dollar terms — than the $118 you’d pay monthly at the highest APR many personal loan lenders offer, which is 36%.

Credit scoreExample APRMonthly paymentsTotal payments
Excellent7%$89$2,136
Poor36%$118$2,832
No credit check required400%$667$16,008

These installment loans have the same features that make payday loans dangerous: no credit check, no gauge of your ability to repay and easy access to your bank account for automatic withdrawals.

The loan amounts range from $100 to several thousand dollars, and borrowers typically make equal, fixed payments over months or years. The loans are usually marketed with a promise of same-day or next-day delivery of funds.

The fact that an installment loan has fixed payments that are spread out over a longer period of time than a payday loan may seem like a good thing. But the sky-high interest rate makes them harmful in the long run.

With the example above, you’d end up paying more than $16,000 over the two-year term, more than five times the $2,832 total payback on a 36% loan.

Some lenders also tack on additional products like credit insurance or charge fees that drive up the cost of the loan even more.

Alternatives to no-credit-check loans

If you need fast cash, you may be able to find alternatives to no-credit-check loans by talking to credit counselors, religious organizations and community nonprofits. Here are more options:

Credit Unions

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. 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

Many online lenders 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.

Payday alternative loans

Known as PALs, these credit union-issued loans help small-dollar borrowers avoid the debt trap created by traditional payday loans.

Updated Feb. 26, 2018.

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