Personal Loans With No Credit Check: What Are They? Why Should You Avoid Them?

If it seems too good to be true, it probably is -- and this is the case with no credit check personal loans. You may have seen these types of personal loans advertised online, but they are not the same as traditional personal loans. In fact, they are quite similar to payday loans because they charge very high interest rates and fees, which make it harder for borrowers to repay.

What Is a No Credit Check Personal Loan?

A no credit check personal loan has features similar to both traditional personal loans and payday loans and is targeted toward borrowers with poor or bad credit. Like traditional personal loans, no credit check loans are usually repaid over longer periods, from six months to a few years (payday loans are repaid within a few weeks). No credit check loans are usually fully amortized like traditional personal loans, meaning each monthly payment will be the same for the life of the loan.

However, unlike traditional personal loans that have interest rates legally capped in most states, no credit check loans have exorbitant interest rates. In many states, the maximum allowed annual percentage rate (APR) on a traditional personal loan is 36%. This APR is what many state governments consider "reasonable". This means that borrowers are more capable of repaying their loan if the APR is 36% or less. Many no credit check loans, on the other hand, have interest rates that are much, much higher than 36%. In fact, the interest rates on no credit check loans are often similar to or the same as the interest rates on payday loans.

Why Should You Avoid Personal Loans with No Credit Check?

One of the major reasons to avoid a no credit check loan is the sky-high interest rates. Many of these no credit check lenders will offer loans with APRs of 200%, 300%, 400% or more. For instance, let’s say you wanted to take out a $5,000 loan with a two year term. If you decide to get a no credit check loan, your APR might be 199%. Over the course of two years, you will pay back a grand total of $20,413, of which $15,413 is purely interest.

In our example, the borrower would pay interest that is over three times the actual loan amount. If the APR on the loan were 400% (as some APRs on no credit check loans are), the total amount repaid would be just over $40,000, which is ridiculous for a $5,000 loan. Let’s compare this to an APR of 36%, which is typically the maximum allowed on a traditional personal loan. With an APR of 36%, the total amount repaid is $7,000, of which only $2,000 is interest. While this is still pretty high, it’s not nearly as bad as the previous examples.

Sample LenderLoan TypeAPRTotal Repaid on 2-Year $5,000 Loan
SoFiPersonal loan - good credit10%$5,537.39
DiscoverPersonal loan - average credit18%$5,990.89
ProsperPersonal loan - poor credit36%$7,085.69
OppLoansNo credit check loan160%$16,834.88
LendUpNo credit check loan396%$39,642.24

If you have bad credit, these loans may seem like better options than payday loans because they are amortized and repaid over a longer time period, but they are not. Looking at the table above, it's easy to see how you could get trapped in a debt cycle with interest rates higher than 36%. Because the lender does not check your credit history, the lender has no way of knowing if you actually possess the ability to repay the loan. And this can land you in a sticky situation where you might have to default on the loan, trapping yourself in a debt cycle that can be difficult to break.

Alternatives to No Credit Check Personal Loans

Like payday loans, no credit check personal loans are not a good solution for your financial woes. If you really need a loan, but have poor or limited credit history, consider these options instead:

  • Personal loan from a community bank or credit union: Many community banks and credit unions will offer small loans starting at $500 to borrowers with limited or poor credit history. Typically, the interest rates on these types of loans will be capped at 18% or 36%, depending on what type of bank or credit union it is. One downside is that you'll normally need an account with the bank or credit union to qualify.
  • Loan or grant from nonprofit or religious group: Many community action organizations and churches provide services to help individuals deal with unexpected financial issues. You may be able to receive a grant or loan, as well as free educational resources on how to manage your money. Some of these organizations may also provide assistance on your utility bills or rent.
  • Cosigned or secured personal loan: Many banks and lenders, like Backed and Earnest, will accept cosigners on a personal loan application, provided the cosigner has good to excellent credit. If you have a willing relative or friend, this could be a good option to get a loan with a much lower APR. Beware, though, that if you default on the loan, your cosigner will be responsible for repaying it. Another option is to get a secured personal loan, as lenders are more likely to approve you with a low credit score if there is collateral to secure the loan. Most borrowers will put up their vehicle as collateral for the loan. Again, beware that if you default, the lender has the right to claim the collateral.
  • Loan from family or friend: Borrowing money from a family member or a friend is also a better option than using a payday or no credit check loan. However, the added risk here is that you might be risking your personal relationships if you can’t pay back the loan. To avoid this, it’s helpful to use a third party to administer the loan. Your family member should also check what tax complications may arise from making a personal loan.

Take Steps to Improve Your Financial Situation

If your financial situation is making you seek a predatory loan (whether a no credit check or payday loan), you need to take steps to better manage your finances. Start with coming up with a plan to tackle any existing debt you have, especially if it's credit card or other "bad" debt. Look at any unnecessary expenses (i.e., entertainment, clothing, eating out, etc.) you can cut and redirect to your debt payments. You should also call your creditors to renegotiate your payment plan -- whether reducing the amount you owe or reducing the interest rate.

Once you have paid down your debt, you should start building an emergency savings funds to help you weather any unexpected expenses and avoid taking out a personal loan in the future. A good emergency fund will have enough money to cover three to six months of your living expenses. For instance, if you spend $2,000 a month on rent or mortgage payments, groceries, utilities, gas and other expenses, then your emergency fund would ideally have $6,000 to $12,000 in it.

This can seem like an overwhelming amount at first, so it’s helpful to break it down into smaller pieces. Start with a goal of saving $100, $500 or even $1,000, and once you meet that, set another goal to save an additional $100 to $1,000. It may take some time to build up your emergency fund, especially if you are new to saving, but it’s worth it to have a financial safety net in case you lose your job or face unforeseen expenses.

You should also learn how your credit score works and what steps you can take to improve it. If you want to eventually buy a home or a car, having a good credit score will help you get approved and help you secure a lower APR. A good to excellent credit score is typically defined as any FICO score between 680 to 850. One of the biggest factors in calculating your credit score is your payment history. Paying your credit card bills and other loans on time and in full is one of the fastest ways to improve your credit score.

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