Fortunately, we live in a world where the extra money you need for an emergency is only a few clicks away. However, most loan providers don’t lend to borrowers with low credit scores. If you don’t have the best credit history, you’re likely considering online loans with no credit check.
However, there are a few things you need to know before you move forward. Let’s take a look at the three main questions that should determine your decision about where and how to apply for a loan:
- What’s the difference between a hard credit check and a soft credit check?
- Why should you be wary of lenders who don’t run credit checks?
- What is an APR, and how does it affect your loan?
How Do Credit Checks Work?
If you’re considering applying for a loan, you’re probably familiar with the term “credit check.” However, it’s important to note that there are two types of credit checks: hard and soft. The difference between them is significant.
Hard Credit Check
When you submit a credit application to purchase a house or a car, you give the potential lender permission to request a detailed credit report and credit score from credit bureaus such as Experian, Equifax, or TransUnion. This request is known as a hard credit check, and it has the potential to negatively impact your credit score for a period of up to 12 months.
The algorithm that calculates your credit score takes a dim view of hard credit checks, especially if it computes that there are too many of them in a short period of time. Numerous hard credit checks occurring close together are often interpreted as a sign that you’re experiencing financial trouble.
The checks could indicate to lenders that you’ve gone on an irresponsible spending spree. They could also signal that you’re in desperate need of new credit cards to pay off rapidly accumulating bills. Either way, the credit scoring model used to calculate creditworthiness will heavily penalize borrowers who incur too many hard credit checks.
Of course, the bureaus take into consideration the fact that everyone likes to find the best deal possible. They understand that a well-meaning person with a good credit history may submit multiple applications in their search for the best car loan. The credit-scoring models allow you a little leeway in such circumstances, but will still punish you if your loan shopping seems extreme.
It’s unlikely that too many hard credit checks will be the sole reason for rejecting your loan application. Whether or not you receive a loan or line of credit will still depend greatly on your financial history. The more important factors are still low long you’ve had a credit history, how much debt you carry, the amount of credit you maintain, and how promptly you pay your bills. Nevertheless, it’s still important to keep in mind that a hard credit check will play a role in the calculation of your credit score.
Soft Credit Check
A soft credit check occurs when your credit history undergoes review without you applying for additional credit. For example, suppose that you want to make a periodic review of your credit history with the major bureaus. Those agencies won’t regard your request as a hard credit check as they would if you were to submit a credit application.
Have you ever received notice by mail or email of your pre-qualification for a line of credit? Those credit card companies have already conducted a check of your credit history. This is considered a soft credit check.
It’s called a soft check because the credit check was conducted without your request. Once you complete an application for that offer of new credit, then the credit card company is authorized to conduct a hard credit check.
Soft credit checks don’t result in the potential acceptance or rejection of a line of credit, so they are not taken into consideration when calculating your credit score.
You can pre-qualify from up 16 of our lending partners with one application using only a soft credit check.
Be Wary of Online Lenders That Don’t Run Credit Checks
Be skeptical of potential lenders who say that they don’t run credit checks. Without a credit check, a lender cannot truly know whether or not you are likely to repay your loan. Traditionally, lenders set a loan’s interest rate according to the level of risk they’re accepting. As the risk grows, so does the interest rate.
So, what does it mean when a lender is willing to offer a line of credit without conducting a credit check to gauge their level of risk? It means that the lender isn’t worried about the risk involved because they’re going to automatically set the interest rate extraordinarily high to increase their chances of making a profit. To further game the system, the lender will also tack on unusually heavy fees for basic administrative duties and penalties. For example, you could be charged a fee even though you made your payment on time but didn’t make the payment using the lender’s preferred payment method.
Payday loans and auto title loans are generally considered the most dangerous types of no-credit-check loans. If you take out one of these loans, expect to pay an exorbitant amount of interest.
Payday loans rely upon proof of regular, verifiable income. These loans, as the name implies, are usually structured to be paid off by your next payday. That period will typically range from two to three weeks.
People in desperate financial situations often find themselves taking out this kind of loan because they feel they have no other option. If any other option is available to you, take it. Otherwise, you could find yourself in even worse financial shape after you pay off the loan and its interest.
For example, analysis by the Consumer Financial Protection Bureau found that 40% of consumers who take out payday loans end up defaulting on the agreement. The same report said that 80% of people with payday loans find that within a month they need to borrow still more money and extend their loan to keep from defaulting.
Auto Title Loans
Unlike payday loans, auto title loans typically offer several months to repay. However, the lender is gambling that you won’t be able to make the final payment. The lender keeps the title of your vehicle until the loan has been satisfied. If you default on the loan, the lender takes possession of your vehicle. At this point, you will not only still have a cash flow problem, but you’ll also have a transportation issue.
Payday loans and auto title loans also present a double-headed problem when it comes to the credit reporting bureaus. There is no reliable way of knowing whether the lender will report your activity to the bureaus.
This is problematic because, if you make all your payments on time and satisfy the terms of the loan, you won’t receive the proper credit if that lender doesn’t routinely report to the credit bureaus. On the other hand, suppose you make late payments and default on your loan, and, in the case of an auto title loan, suffer repossession. That particular lender might be one that regularly reports to the bureaus. Now your credit history has taken another hit.
What’s an APR and Why Is It Important?
Non-credit checked loans have incredibly high annual percentage rates (APRs). The APR of a loan is the yearly rate charged for that loan. The APR, unlike the interest rate, factors in any upfront fees.
Pay attention to a lender’s APR, which will often be higher than their standard interest rate. By law, lenders have to publish their APR, but it’s their interest rate that they will usually promote in their ads.
It’s important to understand the difference between an interest rate and APR. Suppose you borrow $50,000 with an interest rate of 12%. Over a year, the loan will accrue $6,000 in interest or $500 per month.
But, if your lender required certain fees to establish the loan, you’re starting not with a $50,000 loan, but with a $50,000 loan plus fees. Let’s say the amount of the fees are $1,500, making the total loan amount $51,500. You then use the 12% interest rate against the $51,500 loan to calculate an annual interest expense of $6,180. Now, let’s divide the interest paid in one year, $6,180, by the original loan amount of $50,000. This will give us an APR of 12.36%.
Lenders who do not perform credit checks would never give you a loan with an APR of 12.36% as in our example. Instead, you can expect to see an APR of no less than 36%. For perspective, in the case of our $50,000 loan, this would leave you with an annual expense of $18,000.
Why burden yourself with such a huge APR? After all, you’re looking for financial help, not additional debt. Instead of applying for no-credit-check loans, choose one of the many online loan opportunities available from onlineloans.com. Your APR will be reasonable and you can pre-qualify with a soft credit check that won’t affect your credit score.