Disclaimer: Upstart is not a financial advisor. The following content is for informational purposes only.
Let’s face it: when something seems too good to be true, it usually is. That’s especially important to remember when it comes to your finances. Still, there may be times in your life when you need some extra cash in a hurry.
A no-credit-check loan promises just that–plus a fast application process and online, instant approval. If you’re facing overdue bills, medical expenses, or lingering financial stress due to the COVID-19 pandemic, loans without a credit check may seem like a quick, easy way to get ahead.
But are they really? And, most importantly, are they worth it in the long run? In this guide, we’ll break down the different types of no-credit-check loans, direct lender red flags to watch out for, and the safest alternatives to help you get back on your feet without endangering your long-term financial health.
What is a no-credit-check loan?
A no-credit-check loan is a type of personal loan where the direct lender doesn’t run a hard credit inquiry before approving an application. Some may even guarantee loan approval, no matter if you have a low credit score or don’t have any credit yet. In many cases, you can get your money quickly—usually within 1 to 2 days.
So, what’s the catch? No-credit-check loans are usually pretty risky to lenders because of the higher chance of default, or a borrower becoming unable to repay their loan, so many lenders add extra charges to cut their losses. As these charges add up over the term of your loan, you could owe hundreds or thousands more than you originally borrowed.
Types of no-credit-check loans
Many lenders offer online loans without a credit check. You can likely find no-credit-check loans from direct lenders in your community, too. But what are these loans, exactly, and what do they entail?
Let’s take a look at some of the most common types of loans without credit checks:
- Payday loans. Payday loans are extremely expensive, short-term, low-amount loans, usually under $500. In most cases, payday loans are due within 1 to 4 weeks—or when you receive your next paycheck.
Payday lenders often guarantee loans without a credit check, but don’t be tempted by the seemingly easy approval process. The loans are notoriously difficult to repay, with fees equal to an annual percentage rate (APR) of 400% or higher.
The high costs—and missing chunk of your paycheck—often mean you may have to renew, or rollover, your loan, too. In doing so, you’ll stack more charges on top of your principal and risk getting caught in a cycle of debt.
- Auto title loans. Like payday loans, auto title loans don’t usually require a credit check, mostly because you use your auto title as collateral to secure—or guarantee—the loan. Auto title lenders usually charge a fee worth up to 25% of the amount you borrowed, then expect you to repay the loan within the next 15 to 30 days.
You may be able to roll over your auto title loan for a few months. But if you can’t repay your loan within a certain period of time, you could lose your car.
- No-credit-check installment loans. Some lending platforms offer no-credit-check installment loans with online, instant approval. If you qualify for an installment loan, you’ll receive your principal in a single payment, then repay it in installments, usually each month.
You may be able to extend the repayment period on a no-credit-check installment loan. Still, they usually have high interest rates and extra fees that leave you owing much more than you borrowed.
How to spot cash loans with no-credit-check
No matter the type of no-credit-check loan you choose, most feature a few common elements. If you’re not familiar with those elements, you could wind up with a loan that has high monthly payments and impossible loan terms.
Luckily, these personal loan red flags are easy to spot once you’re aware of them. Let’s take a look at the most obvious warning signs of a costly, illegitimate, and potentially predatory loan.
The lender doesn’t verify if you can repay the loan
If you’re actively trying to rebuild your credit, you may want to avoid a hard credit inquiry for two reasons. First, hard credit pulls show up on your credit report and can lower your score by a few points. Second, some lenders won’t approve a loan unless you have a certain credit score (think within the “good to excellent” range, or above 690 on the FICO® Scale).
Most legitimate lenders check your credit score to determine how risky it would be to loan you money. Simply put, they want to feel confident that you can repay the loan. While that may seem unfair, it’s standard practice for most online lenders.
Some lending platforms like Upstart have started considering factors other than your credit score, such as employment or education¹, to determine creditworthiness and make loans more accessible. Still, if a lender agrees to loan you money without checking that you can repay it, you can almost guarantee the loan will come with unfavorable terms.
The loan comes with extremely short or long terms
Speaking of unfavorable terms, even small loans with no credit checks can get complicated fast. Typically, a no-credit-check loan comes with either extremely short or long repayment terms. If your loan has an extremely short repayment window, you may have to pay your lender back within 1 to 4 weeks. This is especially true of payday or auto title loans.
On the other hand, your lender may extend your loan term far beyond a reasonable period. If you borrowed a few hundred dollars and have months or years to repay it, you’ll likely get stuck with high monthly fees that cost you more–and benefit your loan provider–in the long run.
The loan has inflated interest rates or excessive fees
It’s always worth checking average interest rates and APRs before signing onto a loan. It’s even more important if you’re considering a no-credit-check loan. As we mentioned before, most lenders want some assurance they’re not going to lose their money, so they check your credit history or verify your income.
With a no-credit-check loan, you’re more likely to get a loan with inflated interest rates and excessive monthly fees. While it ends up costing you more, the lender will make more money, minimizing the amount that they could lose if you default on the loan.
The downsides of no-credit-check personal loans
No-credit-check personal loans may sound promising if you’re short on funds and don’t meet certain approval guidelines, like a minimum credit score or annual income. But we highly recommend taking some time to consider other options before choosing a no-credit-check personal loan.
These loans can be extremely costly in the long run and could even impact your future financial circumstances. If you’re unable to repay the loan on time, you could get trapped in a cycle of debt that’s nearly impossible to get out of, thanks to compounding fees. You could also lose collateral, like your car.
What’s more, no-credit-check personal loans can still damage your credit score, both now and in the future. As soon as you receive the loan, you’ll increase your debt-to-income ratio, which can lower your credit score by a few points.
This may not seem like a big deal, since you can usually repair your score by repaying the loan on time. But remember: some of these loans are extremely expensive, making it difficult to repay them on time.
If you can’t repay your loan, your lender could report you to a collection agency. After they send your loan to a collection agency, it will show up on your credit report and can significantly reduce your credit score.
Safe alternatives to no-credit-check loans
Not sure if a no-credit-check personal loan is for you? Let’s take a look at some safer, more affordable options that could work for you.
- Secured personal loans. Secured personal loans are a type of loan backed by collateral. You could use your car, house, investments, or another piece of personal property, as long as your lender accepts it.
Your loan provider will likely run a credit check for your secured loan, but you stand a better chance of getting approved since you used your property to guarantee your loan. Just remember to make timely payments; otherwise, you could lose your collateral.
- Credit-builder loans. A credit-builder loan is a type of loan designed to help you build—or rebuild—your credit score. When you get approved for a credit-builder loan, your lender won’t transfer your money immediately. Instead, they’ll place the money in a restricted bank account.
You’ll then pay off the loan up front, generally in monthly installments. Your lender will record your payments and report them to the three major credit reporting agencies—Equifax®, Experian™, and TransUnion®—boosting your credit score in real-time.
Once you finish repaying the loan, you’ll receive the full loan amount to use however you want. It’s a safer and less expensive way to get the money you need while building credit, but it will take longer to get your money, so it may not work for you if you need quick cash.
- Personal loans from online lenders. Many online lenders have strict approval guidelines ranging from minimum credit scores to annual income, but that’s not always the case. Some lending platforms consider alternative creditworthiness factors, making it easier for you to get an affordable, legitimate personal loan with poor or thin credit.
- Co-signing on a loan. Do you have a trusted, financially stable friend or family member? If so, consider asking them to co-sign on your loan. You’ll still be subject to a credit check, but you may be able to qualify for better terms if they have a higher score and more income than you do.
Don’t forget, you still need to make on-time payments. Otherwise, your loved one will be responsible for paying off your loan, making for some seriously uncomfortable family dinners.
- Payday alternative loans. You know that a payday loan is a bad idea because of shady lending practices and outrageous fees. But there is another option when you need cash quickly: payday alternative loans (PALs).
Payday alternative loans come from federal credit unions. They’re typically low-amount loans that max out at $2,000 and have regulated interest rates and fees. Even better, some credit unions will approve applicants without a credit check. And unlike a payday loan, you’ll have anywhere from 1 to 12 months to repay your PAL.
Some credit unions require you to be a member in good standing before you’re eligible for a PAL, but it doesn’t hurt to check with local branches and learn more about their guidelines.
Should you consider a loan without a credit check?
Ultimately, you’re the only one who can decide if a no-credit-check loan is right for you. We know that some difficult financial circumstances require even more difficult decisions. So, if you do decide to pursue a no-credit-check personal loan, take some time to do your research.
Compare lenders, research average rates, and read the fine print to make sure you’re not getting scammed. Find a loan provider who will take some steps to verify you can repay your loan—they’re usually more legitimate than providers that guarantee approval. Most importantly, make a plan to repay the loan within its original term to avoid falling into a debt cycle.
And if you decide that a no-credit-check loan isn’t for you? You may consider a personal loan. In many cases, they can be cheaper and safer than a no-credit-check loan. This can make it easier to get back on your feet without breaking the bank.
¹Neither Upstart nor its bank partners have a minimum educational attainment requirement in order to be eligible for a loan.