The lure of "no credit check" loans is obvious, and the temptation to take out such a loan can be overwhelming for an individual with poor credit and in very tight financial circumstances who needs money quickly. These loans are aimed at individuals who, because of limited financial resources and poor credit, cannot obtain short-term, non-colteralized loans from a traditional lender.
However, there are significant financial dangers associated with these loans, and those who use this financial service often find themselves in an even worse financial position after taking out a loan. Therefore, consumers are advised to consider alternative solutions to a temporary cash flow crunch.
How No Credit Check Loans Work
The most common form of no credit check financing available is what's referred to as a payday, or cash advance, loan. The structure of these loans is simple enough. Lenders offering payday loahns typically offer to loan an individual borrower up to 100% of the amount of their net, take-home pay on their next paycheck. The loan is set for repayment on the date the borrower receives his next paycheck, with the interest charge to be paid calculated for the same time frame.
For example, if a borrower applies for a payday loan on the fifth of the month and his next paycheck is to be received on the 15th, then the term of the loan is 10 days, and 10 days' worth of interest is due, along with the principal amount borrowed, on the 15th. The loan is usually repaid by the borrower writing a post-dated check for the total amount of principal plus interest required to repay the lender in full. Unless other arrangements are made, the lender simply deposits the borrower's post-dated check on the date repayment is due.
The primary danger associated with payday loans comes from the exorbitant interest rates charged. Although past abuses have led to payday lenders being strictly regulated, the basic fact remains that the interest charge is generally in the range of 25 to 30% of the loan amount. In other words, a one-week loan for $400 can require the borrower to repay the lender $520. The annual percentage rate (APR) may be higher than 1,000%, but because these loans are so short-term, the interest charge is commonly looked at in relation to the principal loan amount borrowed. Regulations vary between states, but payday lenders usually charge the maximum interest rate allowed.
Although the $400 loan may help the borrower manage short-term needs to pay bills or handle other expenses, the interest he has to pay on the loan often creates another immediate cash flow problem just a week later. If a borrower is unable to repay the loan plus interest on the date due, most payday lenders are happy to roll over the loan for another paycheck period in return for the borrower paying just the interest amount due. This, of course, results in the borrower paying even more interest charges for the loan. Some people get trapped in a situation where the interest payment required to continuously roll the loan over from week to week ends up becoming another regular bill that further pinches their finances.
The whole arena of no credit check loans is also rife with scams, especially with many lenders doing business only online or by telephone, with no physical storefront offices. Common scams include borrowers being asked to pay an upfront fee that they are told guarantees their loan being approved. It is against the law to charge such advance fees. Borrowers should be wary of a lender stating there is no credit check required, but still asking for personal financial information, such as the borrower's social security number or banking information. This may be an attempt at identity theft or at hacking into the borrower's checking or credit card account.
Better Alternatives to No Credit Check Loans
High interest rate loans, such as payday loans, should be avoided if at all possible. Over the long term, they tend to cause bigger cash flow problems than the ones they can solve. Possible alternative solutions to a cash flow crunch include asking an employer for a pay advance, holding a garage sale or obtaining a loan from a pawn shop for items such as jewelry. Pawn shops charge high interest rates, too, but nowhere near as much as payday lenders, and offer longer loan terms. A credit card cash advance is another possible alternative. Again, credit card rates, especially on cash advances, tend to run high but are still minuscule compared to the interest charged on payday loans.