What are no-credit-check loans, and why should you avoid them?

Obtaining a loan when you have bad credit can be challenging, as most lenders require good credit or better. But if your credit score needs work, there are still borrowing options available, including no-credit-check loans.

Unfortunately, these loans have some significant downsides, including extremely high interest and origination fees. Before proceeding, be sure you understand all the costs associated with this type of lending.

What is a no-credit-check loan?

As the name indicates, a no-credit-check loan doesn’t require a hard credit check or a review of your credit history. Instead, the lender makes its decision based on other considerations, such as your employment status, income or bank account history. You may even borrow based on the value of your collateral, if you apply for a secured loan.

Since borrowers with bad credit are considered a higher risk, lenders charge significantly higher interest rates and additional fees for these types of loans. The average interest rate on personal loans is close to 12.5 percent, but if you have bad credit, you can expect rates closer to 36 percent — if you qualify. No-credit-check loans, on the other hand, may have annual percentage rates (APRs) in the triple digits.

How no-credit-check loans work

Like most forms of credit, you’ll repay the loan balance, plus interest, over a predetermined repayment term.

But unlike loans that require a credit check, no-credit-check loans may have significantly shorter repayment terms (like two weeks, versus multiple years), and your rates will be high. Your responsible repayment may not be reported to the three major credit bureaus — Equifax, Experian and TransUnion — so a no-credit-check loan might not help you build credit.

If you default on the loan, and it’s sold to a debt collection company, the delinquency may be reported to credit bureaus, causing additional harm to your credit.

Why no-credit-check loans are a bad idea

Simply put, no-credit-check loans can lead to quite a few negative financial consequences.

While no-credit-check loans may seem like a great option, some of them — like payday and car title loans — should be approached with caution. Exorbitant interest rates lead to high payments, which can steer you into a relentless cycle of debt, and can negatively impact your credit. Some lenders also tack on additional fees that make it even harder to get your finances in order.

Pros and cons of no-credit-check loans

Before signing on for a no-credit-check loan, be sure you fully understand the benefits and drawbacks of this type of borrowing.

Pros

• Available even if you have bad or no credit
• Easy application process
• Cash provided quickly

Cons

• Higher interest rates and fees than other loan types
• Create a debt cycle that can be hard to escape
• Potential predatory lenders

Types of no-credit-check loans

There are different types of loans that don’t require borrowers to go through a credit check to get approved for the funds. Consider why you need the funds and whether there are alternative options that could be more beneficial to your finances.

• Cash advance apps

  Cash advance apps offer a solution to hold you over until the next paycheck. You can typically borrow between $50 and $1,000 against your future paycheck. When it’s time to settle the advance, it’s typically withdrawn automatically from your account.

  Terms are often better than payday loans since you pay a flat fee per transfer, as well as a membership fee, to access the service in most cases. Some of the best early payday apps skip the flat fee and allow you to contribute a voluntary tip instead.

  Risks of cash advance apps

  • Small borrowing limits may not cover larger expenses
  • Borrowing against your paycheck may leave you short on funds in the future
  • Overdraft fees if your account lacks funds on repayment day

• Payday loans

  Payday loans are small, short-term loans that you can pay back the next time you get paid. These loans should be your last choice because some state regulations allow APRs higher than 400 percent.

  Full repayment is typically due within two to four weeks. These no-credit-check loans are designed to provide you with quick cash to hold you over until your next paycheck.

  Risks of payday loans

  • Extremely high interest rates
  • Short repayment windows (usually two to four weeks)
  • No credit-building potential

• No-credit-check installment loans

  With no-credit-check installment loans, you borrow a lump sum of money and repay it over time through fixed monthly payments. They typically come with larger borrowing amounts than payday loans and can be used to cover almost any expense. Just be aware that some states allow lenders to set their APRs in the triple digits.

  Risks of no-credit-check installment loans

  • Very high APRs in some states
  • Large loan amounts can deepen debt
  • Lenders may include hidden fees
  • Missed payments can lead to collections

  Learn more: Payday loans vs. installment loans: What’s the difference?

• Pawn shop loans

  Pawn shops offer cash in exchange for a valuable item that you own. To make the loan, the pawn shop will typically assess the value of the asset you’re offering and provide a cash loan for a percentage of the item’s value. The pawn shop then holds onto the item until you repay the loan in full. If you fail to repay the debt in time, the pawn shop can sell the asset you provided as collateral.

  Risks of pawn shop loans

  • Your personal property is on the line
  • Loan amounts are often a fraction of the item’s value
  • High fees and short repayment windows
  • No credit-building benefits

• Car title loans

  Car title loans are secured loans that use your car title as collateral. Just like payday loans, title loans should be a last resort — the average auto title loan has an APR of about 300 percent.

  The amount you can borrow depends on your car’s value. In many cases, you must own your vehicle outright to qualify. Most lenders will allow you to continue driving your car as you repay the loan, but if you default on the loan, the lender may repossess your vehicle.

  Risks of car title loans

  • Typical APRs around 300 percent
  • Risk of losing your car
  • Short repayment windows
  • Often only available to those who own their vehicles outright

• Buy now, pay later (BNPL)

  BNPL is another short-term financing solution that doesn’t require a credit check. The primary draw of BNPL is the ability to finance purchases and pay over time without interest. That said, you could be subject to penalties if you’re unable to make timely payments, and overspending is easy. You can make a one-time purchase and repay what’s owed in equal installments across a few weeks or months.

  Some BNPL platforms, like Affirm, require a down payment and collect the remaining balance in three installments in weeks two, four and six following the initial purchase date. Others, including Klarna, allow you finance the entire purchase with no money down and collect payments every two weeks. Most BNPL companies do not report to credit bureaus.

  Risks of buy now, pay later (BNPL)

  • Late payments can trigger fees or penalties
  • Easy to overspend and accumulate debt
  • Some plans require upfront payment
  • Most BNPLs don’t help build credit

How to shop for no-credit-check loans

No-credit-check loans are offered by a variety of lenders, some of which may be less reputable than others, making it important to do your research:

1. Review the interest rates charged by each lender. Even if you get stuck with a high APR, comparing lenders will help you identify the lowest, most competitive rates you qualify for.
2. Understand all fees associated with borrowing. With payday loans, for instance, the lender may charge a flat fee per $100 borrowed. This can result in a high equivalent APR, even if there is no interest.
3. Read online reviews. Before deciding on a lender, check each lender using websites like the Better Business Bureau (BBB) and Trustpilot to help you steer clear of any scams or companies that have patterns of poor customer experiences.
4. Know your state laws. Before signing a loan agreement, make sure that the loan you’re considering is actually legal — that the lender is following the limits on fees, interest and loan terms.

Safer alternatives to no-credit-check loans

There are several alternatives to no-credit-check loans that can give you the funds you need even if you have bad credit or no credit.

Bad credit loan lenders

Some lenders specialize in lending to borrowers with poor credit. If you go with a bad credit loan lender, you may be able to secure a lower interest rate than you would with a no-credit-check loan. To get the best bad credit loan rates, shop with several lenders before applying.

Credit unions

Compared to banks, personal loans from credit unions often have lenient requirements. As long as you’re a member, you may be able to get approved for a loan from a credit union even with bad credit. Credit unions will likely look at your entire financial picture in addition to your credit. Federal credit unions are required to cap interest rates on most loans at 18 percent.

Payday alternative loans

Payday alternative loans (PALs) are small, short-term loans offered by some federal credit unions. Loan amounts typically range from $200 to $2,000. They’re generally more affordable than traditional payday loans and repayment terms range from one to 12 months. Rates are capped at 28 percent.

If you apply for a PAL, a credit union will require proof of your income to ensure you can repay the loan.

Secured loans

Secured loans are protected by collateral, which is something valuable you own. Collateral can be a physical asset, such as a house, car, boat or even a cash deposit. Since secured loans are less risky for lenders, you get approved for one with bad credit. The caveat is that the lender may seize your collateral if you default on your loan.

Learn more: Secured vs. unsecured personal loans: Key differences

Secured credit cards

You may not get approved for a traditional credit card with bad credit. That’s where secured credit cards come in — some issuers do not do credit checks for them. When you open a secured credit card, you make a cash deposit that’s typically equal to your credit limit. The credit card issuer will take your deposit if you don’t repay your bill.

Bankrate loans editor Pippin Wilbers started his credit-building journey with a secured credit card, using it for small everyday purchases. “Paying it off immediately helped me build a good credit score relatively fast, even with a small starting credit limit,” he says.

Cosigner loans

If you’re ineligible for a loan on your own, ask a trustworthy friend or family member to be your cosigner to apply for a loan with you. You’re more likely to get approved and qualify for a lower personal loan interest rate if you have a cosigner with good or excellent credit. Just make sure you repay the loan so you can improve your credit, and don’t leave your co-signer responsible for the payments.

Bottom line

No-credit-check loans can be a tempting option if you’re pressed for cash and have a spotty (or non-existent) credit history. But many lenders charge interest rates well into the triple digits, so you will need to carefully consider before signing.

Research and consider all available alternatives to ensure you make the best financial decision for your circumstances.