You’ve been offered a loan with no credit check required. If you’ve got bad credit, that’s great news, right?
Wrong. In fact, it means you’re being offered a loan that’s little better than a payday loan or car title loan. Those are loans with annualized interest rates well north of 100%. In fact, just about any kind of loan is a better option than these. Here’s why you need to avoid loans without credit checks, and what you can do instead.
What Is a ‘No Credit Check Loan?’
Many state legislatures are cracking down on the predatory practices of car title loans and payday loans. However, lenders are smart – and they’re coming up with new ways to offer similar services that don’t run afoul of the new regulations.
In fact, some even refer to these new kinds of loans as “payday installment loans” because of their overall similarity to payday loans. Usually, these are just the same old payday loans, but paid back in installments rather than in one lump sum, like you might have been used to.
The interest rates might be capped at 36%, depending on where you live – and that’s an improvement when APRs on payday loans often climb into the hundreds of percent. However, 36% is still a sky-high interest rate. And given how often the interest is charged, the actual interest rate might be into the hundreds again, just like with the old payday and car title loans. Other times, lenders skirt around laws prohibiting high interest rates by simply charging higher fees instead, effectively making the loan just as expensive.
The bottom line? Any reputable lender is going to want to run a credit check before they give you a loan of any kind. Anyone who doesn’t is offering very high-risk loan services – and passing the cost of this risk along to you.
What Can You Do Instead?
What are your other options if you really need some quick cash but you don’t want to go crawling to a predatory lender?
Credit unions: Credit unions tend to be far more forgiving toward people with bad credit than commercial lenders. What’s more, they often have services that are similar to those offered by predatory lenders — small, short-term loans — without the incredibly high interest rates and fees. They’ll also work with you to define terms of a repayment plan that works for you.
Online lenders: Several online lenders are filling the gap where commercial lenders aren’t serving customers. The most you’re going to get charged by these lenders is 36% — which isn’t great, but it’s a lot better than the effective 400% or higher interest rates you’re likely to be charged by predatory lenders.
Credit card: If your credit is bad or nonexistent, you may not have a credit card at your disposal – or, at least, not one that isn’t maxed out. But if you do have a credit card, it can help you get through a rough patch. The double-digit interest rates aren’t great and can lead you deeper into debt like any other loan, but it beats relying on more predatory lenders. You can pay a number of bills with your credit card, and some cards offer no-fee cash advances – though note that, unlike with a purchase, interest begins accruing immediately on a cash advance.
Communicate: If you need quick cash because you’re behind on payments – whether it’s your rent, a credit card, a car loan, or the utility company – call the company or person you owe money to and explain the situation. See if they can adjust the terms of your payment plan – the worst they can say is no. And make no mistake, that’s probably what they will say – but if you can buy yourself some time or lower your minimum payment for a couple of months, it could create the breathing room you need.
Avoid Falling Into This Trap
There are two things you can do to prevent yourself from falling into this trap again:
Improve your credit score: Get your credit score up by getting and using credit responsibly. If you have open accounts, pay them down. Reducing the amount of debt you have on your credit cards is one of the easiest and fastest ways to improve your credit score. Other than that, it’s mostly all about making your payments on time.
Emergency fund: An emergency savings fund, equivalent to three to six months of living expenses, will make it so the next time something comes up — a health emergency, worn-out tires, an unexpected trip, what have you — you’ll have a cushion to fall back on without falling into high-interest debt.
No one wants to go to predatory lenders if they can help it. Avoid them when you think you need them, and once you’re back on your feet, take measures to avoid ever needing them in the future.