3 Month Payday Loans

We understand emergency expenses may come up and you need to stay on track with your bills. You’re considering different payday lenders because you need to borrow money until your next paycheck. Payday loan lenders have a negative reputation but we guarantee that better alternatives exist and some have your best interest in mind. At Possible, we believe every American should have access to financial services and assistance. If you’re not familiar with how payday loans work, we want to provide you with resources so you can make the best financial decision for yourself. 

What’s a 3-Month Payday Loan?

Payday loans, also known as cash advances, are short-term, low-balance, high-interest loans intended to hold you over until your next payday – this is where the name comes from. It’s meant to be a form of easy cash, albeit having a higher APR (annual percentage rate) than personal loans, credit cards, and other high credit score products. Usually, payday loans and short term loans have a loan term of less than 3 months because these unsecured loans are meant to be paid back in a very short period of time. There are many loan options to choose from and receive fast cash. You may not even need to leave your living room to apply for a loan – there are in-store and online payday loan applications available. Take some time to research what’s available in your state. Ideally, it’d be great if you had a friend or family member that could help lend you money to cover your emergency expenses, but this is not possible for everyone. Fortunately, you’re not alone because many households have taken out a payday loan.

The Pew Charitable Trust estimates that 12 million Americans take out a payday loan each year. Payday loans are advertised to help with unexpected, emergency expenses by the borrower but the study found 7 out of 10 borrowers use the money for regular, recurring expenses such as rent or utilities. The Consumer Financial Protection Bureau (CFPB) became concerned about people getting trapped in a cycle of debt so they’ve issued regulations on payday loans such as the number of loans a borrower can receive. “For millions of Americans living paycheck to paycheck, seeking out a loan in a time of need shouldn’t end in financial disaster. The rule is an important step that starts the process of ending the nightmare of spiraling debt for so many consumers,” says Michael Best, director of advocacy outreach at Consumer Federation of America.

What’s the Maximum Amount You Can Borrow From a 3m Payday Loan Lender?

The loan amounts are small and many states limit the size of a payday loan. The most common loan limit is $500 although the limits may range above or below this amount. Your payment will typically be due in one payment on your next payday or when you receive another income source such a pension or Social Security. This is a difficult option because you’ll be paying back the loan and the finance charge in a short period of time. Many borrowers end up paying more in fees than they actually received in credit. Both offline and online payday lenders have access to your bank account to ensure that they’re able to collect from your paycheck before other bills are due. If the payment isn’t paid in full on the first payday, a new finance charge is added and the debt cycle continues. A debt cycle is when a person cannot pay back their debt and continuously borrows or extends out their debt to prolong paying it back. Be careful to not get yourself in a debt cycle. There are payday loan and cash advance options where you can make installment payments instead. 

What’s an Installment Loan?

You may have heard about a three-month payday loan option which is more like an installment loan. A three-month payday loan would provide a three-month loan term for you to make installment payments. If you’re searching for online loan lenders, you’ll find that lenders like Possible will market the loans as “installment loans.” There are many types of installment loans – in fact, mortgage (for real estate or homes) and car loans (for vehicles) can be counted as installment loans because you repay back a portion of your loan in fixed amounts spread out over time. However, most states have laws in place that won’t allow you to take out a three-month payday loan because there’s a limit on how long a payday loan can be active. Some lenders will roll over your loan payment to go around the term limitations. A loan rollover is when you pay the interest and fees on your loan’s due date. The lender allows you to hold onto your original principal and issues your loan new terms and due dates. Trying out an installment loan allows you to make smaller payments instead of a lump sum on your next payday. The benefit of an installment loan is the payments due are predictable and makes it easier for you to budget your loan payment each month. Possible is a payday loan alternative and will allow you to make your payments in smaller, more affordable installments. 

Will You Be Able to Borrow More?

A potential drawback for installment loans is you can’t borrow more than you were originally approved for and you can’t borrow more when you have amounts outstanding with your lender. In order to receive more money, you will need to pay off your current loan and then reapply for a higher amount. Possible includes a loan amount selection feature in the mobile app to let us know how much you’d like to apply for. This amount isn’t guaranteed but it gives us a target of how much you’d like to borrow. 

What is the APR and How is it Calculated?

It’s not uncommon for the annual percentage rates (APR) to exceed 500% or even 1000%. The annual percentage rate is calculated by ((principal * 365) / term) * 100. The average APR for a payday loan or cash advance is 391%. State regulations will determine how much a brick and mortar or online payday lender can lend and how much interest they can charge. With Possible, we offer consumer-friendly borrowing fees between 150 and 200%. The fee will vary state by state so we recommend downloading the app to find out how much the specific borrowing fee will be. 

Do You Qualify for a Payday Loan?

Make sure you do some research and see what loan options are available in your state. There are limited borrower qualifications to receive instant cash. Most payday lenders require borrowers to have a valid ID, an active bank account, and proof of income. Be sure to use reputable lenders who will protect your information, are not susceptible to hack, and abide by federal and state law. Employees at payday lenders will also have access to your information so go with a lender you trust.

Your ability to repay the loan is often not considered in the loan application process. Be careful not to get into a debt cycle. You’ll need to understand your finances by knowing how much income you’re bringing in and where all the money goes. Many borrowers can’t afford the loan payments and end up paying late fees to delay their payment date or refinancing the debt until they end up paying more than the original loan amount. The CFPB found that 80% of payday loans are taken out by borrowers within two weeks of repayment of a previous loan. At Possible, we want to help alleviate financial stress for our customers by never charging a late fee. We understand financial hardships happen and want to assist you during those times. 

Do You Qualify for a Loan With Possible?

Our online and mobile loan platform requires an ID, SSN number to verify your identity, and an active checking or savings account that received at least three months’ worth of income. Possible has both an iOS and Android app and you can download the Possible app on the respective app store. Even though we like to see at least three months’ worth of income, we may be able to work with you if you opened up a new bank account and have at least a month’s worth of income. We recommend you make a minimum of $750/month, have a positive bank balance – the higher the balance, the better – and no recent overdraft fees. The loan decision is based on a variety of factors based on your bank data. We do our best to not over-lend to customers, which makes it hard to repay and causes overdraft fees. Due to state regulations, today, we’re only available to Washington state, Idaho, Utah, Texas, Ohio, and Florida residents at the moment. It takes time to expand into a new state but we’re working on it. If you select a state we don’t service, we will put you on the waitlist to get notified once we are available in that state. Please contact our customer service at [email protected] if you have any questions about the process.

How Do Installment Loans Work?

Once you’re approved for a loan and accept your loan agreement, you are given the option to make smaller installments. Most payday loan lenders can provide you with instant cash, but the payment is due in a lump sum, making it difficult to pay back. We understand life happens and if you’re not able to make a payment on the scheduled date, the app provides a 29 day grace period for you to update your payment dates and make a repayment within your grace period. 

What Happens if You Can’t Pay On Time?

Any payments that are past the 29 day grace period is considered late to the credit bureaus. Possible is bound by federal law to report accurate information to the credit bureaus and we won’t be able to amend late payments. The late payment will negatively impact your credit score until it’s paid off. We encouraged to pay off your cash loan on the originally scheduled date, even if your cash flow is getting a bit stretched. In addition, outstanding payday loan debts can can limit you from further borrowing from payday lenders depending on what credit checks lenders use and regulations within your state. In states like Texas, there have even been payday lenders and financial institutions who file criminal charges for a breach of contract or fraud against those who can’t pay back. If this happens to you, please contact legal counsel or attorneys in your area to understand the law the get the right advice for your situation.

Does Your Credit Score Determine Your Eligibility? 

You may be worried about not qualifying for a loan because you have a poor credit score. Luckily, having a good credit score isn’t required for payday lending and especially for companies like Possible. During the application process, Possible will perform a “soft pull” on your credit score for fraud prevention and identity verification. Soft pulls will not impact your credit score and we do not base our loan decision on your credit score. In addition, check out other loans that don’t require a credit check.

Do Payday Loans Help Build Credit?

Most payday and short term loan lenders do not report to the credit bureaus so it won’t help you build credit. Possible reports to all the major credit bureaus including Experian, TransUnion, and Equifax. We report the status of all loans at the beginning of the month for payments made the previous month. This is done on purpose to give you a chance to catch up in case you missed a payment. Each credit bureau will process our reports at different times so you may not see changes to your credit report immediately. 

The best way to build your credit score is to make sure your payments are made on time. This applies to payday loans, student loans, credit card payments, auto loans, and rent. You can also look into credit-builder loans to understand whether that’s a fit for you.

What Happens If You Default on a Payday Loan

In 2019, more than 12 million Americans will turn to a payday lender for cash. This is usually in the form of a cash advance or payday loan. Most people have every intention of paying back the loan in full and on-time. However, as we all know, life happens – you have an unexpected expense, you lose your job, and your upcoming debt payment slips your mind. Whatever the reason, something prevents you from being able to pay off your small loans when you intended. Before you know it, the loan enters a scary sounding state, like Default, or Collections, and you start receiving ominous messages from the payday loan lender or a collections agency. It can all feel very overwhelming!

If you find yourself in this situation, don’t panic! Take comfort in knowing that you’re not alone in this – it’s estimated 71 million Americans have at least one debt in collections. This article will break down what happens when a brick and mortar or online payday loan goes into Late, Default, or Collections, and give you strategies to best manage the situation.

Need a refresher on payday loans? This overview of payday loans will help you get an in-depth understanding.

Terminology for Payday Loan Statuses

First things first, let’s get some terminology out of the way. Most lenders like a bank, credit union, or Possible use similar words to describe different statuses or states of a loan, whether it is a personal loan, short-term loan, payday loan, student loan, credit card, or something else. When managing your loan, it’s helpful to have a sound understanding of these terms and what they might mean for you: 

• Current – Yay! This is the best loan state to be in. Your payments are up-to-date and you do not have any outstanding payments. All payments will be reported to the credit bureaus as paid on-time. In an ideal world, you’d always be in a Current status.
• Late – One or more of your loan payments are past due by at least 15 days. Some lenders may break this down even further by splitting out Late statuses into something like: Late (16-30) or Late (31-45). Either way, the best way to think of Late is that you’re slightly behind on your payments. Depending on the loan, you may experience some additional late fees and be at risk for negative impacts to your credit. The good news with a Late status is that you can often catch back up to a ‘Current’ status and finish the loan term with a paid-on-time status.
• Default – Payment(s) have been outstanding for an extended period of time. The amount of time depends on the lender but is typically at least 60 days late. At Possible, we consider a payment in Default if it has been 60 days late from the original payment date. When a loan enters a Default state, the customer is likely to experience negative consequences in terms of increased fees and/or negative impacts to their credit. In some states, like the state of Washington, lenders are required to report any customer in Default to a state database. As a result, this will prevent customers from obtaining new payday loans as other lenders, by law, cannot offer the customer a new loan until the original loan has been paid in full.
• Charged-off – While technically an accounting term, you may come across this term if you fail to pay off your loan. A loan moves to a charged-off state when there is a reasonable expectation that the loan will not be paid in full. The loan originator is accounting for this expectation by marking the loan as a loss in their accounting records. This typically happens right before a loan is sent to Collections. When a loan enters a charged-off state, the customer is likely to experience even more negative impacts to their credit score.
• Collections – At this point, the loan originator no longer thinks they can recover any money from the loan and sells the loan to a 3rd-party collections company to collect immediate cash. The collections agency will takeover all communications with the customer regarding the loan. The primary goal for the collections agency is to get the customer to pay something, even if it’s a really small percentage of the amount outstanding. In the industry, this is called “Settling.” Please note – if you settle, the loan will be reported to credit bureaus as ‘Settled.’ This status still carries negative consequences since the loan was never repaid in full.
• ‘Closed’ or Paid-off – Often used interchangeably, closed/paid-off mean roughly the same thing — your loan has been fully paid and there are no outstanding payments. Expiran does a good job breaking down the definition here. 

What to Expect When You Can’t Repay a Payday Loan

Now that we understand some of the basic terminology, let’s walk through what you can expect if you find yourself not being able to repay a payday loan.

Inbound messages increasing in severity over time

No surprise here – one of the very first things you can expect is a message from the lender in which you took out the pay day loan. Normally, immediately upon failure of the first payment, the payday lender will send you a message letting you know that the payment(s) weren’t successful. These messages will include instructions on what to do next and how to make a payment. The expectation here is that you, as the customer, take some sort of action on the loan like making the payment successfully. If you don’t, it’s likely these messages will increase in frequency and severity. These messages will mimic the loan statuses mentioned above (Late > Default > Charged-off > Collections). Because you likely signed an Electronic Communication Agreement when you took out the loan, you can expect the lender to reach out to you through a variety of communication channels: email, SMS, voice, push notifications, and/or physical mail. These messages can feel extremely overwhelming. The main thing lenders are looking for is some sort of engagement from you. We recommend engaging with the lender and communicating your plan to repay the loan as soon as possible. Even if you cannot repay the payment in full immediately, working proactively with the lender may result in more flexibility, less stress, and a better end result.

Handoff to collections

If you don’t take action on the loan, it’s highly likely that you will be handed off to a 3rd-party collections agency. Typically, the original lender will send one last email requesting payment before letting you know that your loan has been passed off to a collections agency. Once given to a collections agency, you can expect a barrage of messages from them. Most of these agencies have advanced, automated messaging systems that send messages following a certain set of logic. As mentioned above, their primary objective at this point is to get you to pay at least some portion of the loan. The good news: you will likely be able to negotiate the cash settlement amount to a fraction of what is owed on the loan. The bad news: if you settle, this status might be reported to credit bureaus. This is because settling means you did not pay back the full amount of the loan. This will not only hurt your credit score but may also impact your ability to take out a loan in the future. 

At this point, we recommend engaging with the collections agency and making an offer to settle. It’s in their best interest to settle, so you might be able to pay off the loan at a fraction of the original cost.

Impacts of not paying back a payday loan

By definition, there is little legal recourse a payday lender can take in recovering payments from a payday loan. These loans are, by definition, unsecured. That being said, there are negative consequences you should be aware of: 

• Credit – Many payday lenders are now reporting the status of payday loans to credit bureaus. For most customers, this is seen as a huge benefit as it helps people establish and build credit such as through the Possible loan; however, if you’re unable to make repayments on a payday loan, you can expect to experience negative impacts to your credit. These negative consequences will only increase the longer you wait to pay back and next time a lender runs a credit check, you might be unpleasantly surprised at the drop in your credit score.
• Extra fees/interest – Depending on the lender and the state in which you live, you may be at risk to increased fees and interest if you’re unable to repay your loan. These extra fees often come in the form of non-sufficient funds (NSF) fees that the lender is able to charge as a result of an unsuccessful payment. Additionally, some states allow lenders to charge extra interest on outstanding payments, which means the interest on your payments will increase the longer you wait to make a repayment.
• Harder to obtain loans in the future – Not repaying your loan may impact your ability to obtain short-term financing in the future. Payday lenders have a couple ways to see if you’ve paid payday loans in the past, specifically: credit report checks (even soft pulls!) and bank transaction data analysis. If you want to keep open the possibility of receiving a payday loan in the future, it’s helpful to pay off your loans. Because once you default on a loan, your short-term lending and short-term credit options will likely be limited in the future. It may even impact whether you can get a checking account, credit card, or debit card in the future.
• Ongoing stress and anxiety – Carrying around debt can lead many people to feel increased levels of stress and anxiety. In fact, there is a name for it: debt-stress syndrome. It’s easy to ignore this impact, but for many people, it’s a very real consequence of not paying back a payday loan. If you find yourself feeling increased levels of stress or anxiety due to your financial situation, you can contact a professional or doctor for help. In addition, there are non-profit credit counseling options available if you do the research.
• Texas lenders turn to criminal prosecution – While not common in most states, in Texas some payday lenders are turning to the courts to criminally prosecute customers “by using the state’s bad check and theft by check laws and arguing that delinquent borrowers are committing fraud or theft.”

Strategies to manage the debt situation

Regardless of how dire the situation may seem, you’ve got options. In the section below, we’ll focus on strategies to best manage payday lending debt. If you’re looking for generic advice regarding debt management, we recommend checking out this NerdWallet article (it’s one of our favorites!): How to Get Out of Debt – 7 Tips That Work. 

Understand the cost of all debt and pay the most expensive first. If you find yourself in a situation where you cannot repay a payday loan, it’s likely that you may have some other debt you need to address. We recommend going through all of your outstanding debt and identifying the following information: fees and interest, finance charge, amount outstanding, and due dates. From here, there are two schools of thought: quick wins by paying off small debt vs. long-term approach of paying highest interest first from the extra you have available in your bank checking account. There are also payday loan consolidation products out there, usually in the form of personal loans. Be sure to calculate the annual percentage rate (APR) on your debt to compare things on an apples-to-apples basis. Here at Possible we believe people should optimize for long-term financial wellness, and thus, should first focus on loans with the highest fees & interest. 

Ask your lender for an extended repayment plan – Most lenders and financial institutions are governed by state regulations when it comes to repayment plans. Depending on the state in which you live, you may be entitled to an extended repayment plan. These plans often allow customers to pay back the loan over an extended period of time, with no additional fees or interest, and may even allow you to split up payments. For instance, in the state of Idaho the extended repayment plans “must provide for at least four (4) equal payments over a time period of not less than sixty (60) days.” To find out if you’re entitled to an extended repayment plan, contact your lender or visit your state’s online department of financial regulation. 

See if the lender allows for a grace period – Some lenders, in addition to extended repayment plans, may offer what’s known as a “Grace Period.” These grace periods give customers additional flexibility with regards to the exact timing of when money will be withdrawn from their account. While the underlying payment dates on the loan contract may not change, the date of the Automatic Clearing House (ACH) instructions (i.e. the date the money will be withdrawn from your account) can be changed through changing the “Grace Period.” In addition to giving yourself some more time to repay, you should not incur additional loan fees or negative consequences to your credit score by taking advantage of a grace period. To find out more, contact your lender to see if they offer grace periods. 

Evaluate whether a rollover is worth it – In some states, you’re able to refinance your amount outstanding with a new loan. However, we do not recommend this approach as it can often lead a borrower into further debt and potentially send people into a debt spiral. This approach should be used sparingly and only if you are certain that you can repay both the original loan and the rollover loan. Here at Possible we believe that rollovers often trap a borrower in a bad debt cycle. As such, we do not offer rollovers in any state in which we operate. 

Settle with a collections agency for a fraction of the cost – If you find yourself in a situation where you simply cannot make a repayment, there is a high likelihood that your loan will wind up with a collections agency. If this happens to you, it’s important to know that you can negotiate with these collections agencies. Their primary objective is to receive some money from you. So make an offer and see if they take it!

Save and make a monthly payment – Perhaps the best thing you can do is budget, save, and make a payment. This debt will likely not go away anytime soon. The best thing you can do is to come up with a game plan for how you can save enough to make a payment on the outstanding balance. 

NOTE: Beware of abusive collection practices – We have heard from a lot of our customers about abusive practices related to collection agencies. Please note – all collection agencies must follow a very specific set of laws and regulations in order to collect funds. Below are some of the most common abuse practices used by collection agencies: 

• Abusing communication laws and guidelines by contacting customers outside of approved hours and/or sending multiple communications in a single day
• Making unsubstantiated threats in the form of increased costs and/or other punitive actions

If you’d like more information about debt collection laws in your state, please check out your state’s consumer protection site.

How does Possible think about this defaulting and collections

To best understand how we think about fund recovery and collections at Possible, a payday loan alternative, it’s helpful to first understand our Core Values: Empower with Trust, Serve with Empathy, and Succeed with Grit. All of these values play a crucial role in how we think about collections and fund recovery at Possible. Like the Core Values article mentions, we not only trust each other but we hope to build deep and lasting trust with our customers. This trust goes both ways. Our customers place a lot of trust in us; we place a lot of trust in them. This core tenant of trust is at the center of how we think about fund recovery and collections. 

First, we trust that the vast majority of people who take out a loan with us have a genuine intention of repaying that loan. This is core to how we approach fund recovery. An example of this is with our messaging to customers who have failed a payment or enter a late/default state. We strive to make our messaging to customers reflect that trust. 

Secondly, as it relates to ‘Serve with Empathy’ we’re working to build an approach to fund recovery that puts us in our customers’ shoes. We do this in a couple ways:

1. We only re-attempt failed payments if we have high certainty that the customer has enough income to cover the payment. This is because we try to put ourselves in the shoes of a customer. We know overdrafts are a very real thing and we don’t want to be the cause of an overdraft for our customers. 
2. We try to give customers ample warning if we do re-attempt a failed payment. This gives the customer time to let us know if the upcoming attempt needs to be adjusted. 

These two things are not required by law, but what we’ve determined here at Possible are the right things to do. 

If you are a current customer and think we can do a better job when it comes to managing customer who cannot repay their loan, please let us know. We welcome the feedback to improve the process and make it better for customers. If you’re looking to apply for a Possible loan, download the Possible app and borrow money today!

What is a “No Credit Check” loan?

A no credit check loan is a loan in which the lender does not do any type of credit check or pull any type of credit report on you as the borrower before lending you the money.

Traditionally, direct lenders base their decision on giving you a loan on a variety of factors, but one of the most important is your “creditworthiness”. Creditworthiness, or how suitable you are to receive credit, is often based on your reliability in paying money back in the past among other factors. Since most of the time, a lender doesn’t know anything about you, they turn to outside sources to get a better idea about your creditworthiness. This is where credit bureaus such as Expedia, TransUnion, and Equifax come into the picture. Credit bureaus each have their own formulas they use to calculate your “credit score” turning your credit worthiness into an easy number. The mostly widely used credit score number is the FICO score, which can range from 300 on the low end to 850 on the high end.

But no credit check loans are loans where your lender completely skips the credit check. Instead of looking at your credit score and your credit report, lenders will look at alternative data to help determine your creditworthiness such as your bank balance, employment history, income and, in some cases, even your educational background. Lenders are able to get a more holistic look at the customer, excluding credit history, before making a decision on lending you money. Payday lenders tend to look at your income and employment to make a lending decision. Instead of pulling your FICO score, Possible looks at alternative data such as your bank account history to determine whether to give you a loan. That’s why many people with credit scores of 550 and below can still get a loan with Possible, get the cash they need, and build credit.

Why would lenders skip a credit check?

Credit scores are calculated based on your credit history. Basically, the longer your history of balancing debit and repaying loans, the higher your credit score will climb over time.

According to research by Experian in 2017, about 25% of American adults have a “thin” credit file. A “thin” file usually lists between 1-4 credit accounts and can make it difficult to find qualifying loans. Another 16% of adults have little or no credit history, making them essentially invisible in credit checks. Less-than-perfect credit is absolutely quite common.

People with thin files or a lack of credit history can find themselves in a catch-22. They don’t have enough credit history to qualify for loans, credit cards, and other debt, and they can’t build credit because they don’t have any outstanding loans, credit cards, and other debt. Unfortunately, by relying on credit scores alone, lenders lock out those who have no to little credit history or are trying to rebuild after accumulating bad credit. 

For those with thin files, there are a few options for building credit history. Secured credit cards and credit builder loans can offer a foot in the door but require a larger up-front cash commitment. Short-term loans, payday loans, installment loans, and payday alternative direct lenders can offer options for building credit; however their rates and fees tend to be higher and provide a shorter period to repay due to the higher risk lenders take on by extending this type of credit to borrowers. Learn more about payday loans and payday loan alternatives to determine if that’s the right option for you. Personal loans can also help build credit history but personal loans can be harder to qualify for due to minimum credit scores even if the fees are lower.

What are some types of no credit check loans?

The only thing no credit check loans have in common, is the absence of a credit pull or credit inquiry on the borrower. Many types of loans have a no credit check alternative; however, these loans tend to be most common with short-term and payday loans.

Personal and payday loans. These are the most common type of no-credit check loans. Loan amounts vary from a few hundred dollars to thousands. Since payday loans are inherently more risky for lenders are are considered unsecured loans, they tend to have higher interest rates and fees and shorter repayment periods. While almost all personal loans, student loans, car loans, mortgages, etc. are reported to the credit bureaus, traditional payday loans tend to be unreported. If you’re looking to build credit, make sure your lender regularly reports to the three major credit bureaus. Without consistent reporting, your credit score will never improve, no matter how often payments are made on time.

Installment loans. These are loans that are approved for a set amount and cannot be increased until the current loan is completely paid off. These limitations help lenders limit their risk while helping customers gain access to larger loans as they demonstrate reliability. Installment loans are paid back over time in specific amounts and because there are multiple repayments, as long as the lender reports payments to the credit bureaus, you build credit history. A Possible loan is also considered an installment loan that builds credit history.

Secured credit cards. A secured credit card requires an up front money deposit, usually a few hundred dollars in cash from the borrower. This cash deposit helps lenders minimize their risk while lending to you. As you use your card and make payments on its balance, your lender reports to the bureaus helping to build your credit score. After you have established enough lending history, your card can be “upgraded” to a standard credit card and your cash deposit is returned by your lender. If you cannot qualify for an unsecured (standard) credit card, you can consider a cosigner on the credit card.

Credit builder loans. The primary purpose of a credit builder loan is to build credit history. Those with no credit history or bad credit can use credit builder loans to try to improve their credit score. Credit builder loans usually involve borrowing money which is immediately deposited into a bank account controlled by lender. As you repay the money borrowed, you build credit history. Loan amounts usually range from $300 to $1,000. Rates and Fees are low on a credit builder loan although there can sometimes be an origination fee. Once the loan is fully repaid, you can access the loan and control of the bank account is given to you. Credit builder loans are available at many banks and credit unions.

P2P lending. While traditional lenders overlook a growing portion of the public, new types of lending have appeared to fill in the gap. One of the more radical shifts has been the appearance of “peer to peer” lending markets. Peer to peer lending matches borrowers with individual lenders to finance loans without the backing of any major banks or financial institutions. These loans tend to have decent rates due to the competitive nature of the market and some lenders may be more willing to approve lenders with lower credit scores than traditional banks. While P2P lending can be a great alternative to payday loans, most lenders will not report to the credit bureaus, making it difficult to build credit. Since lenders will be working directly with an individual rather than a company, P2P lending offers less services and support than lending with a bank or other established money lender.

Title loans. These are loans that require an asset from borrower as collateral for use by the lender. Because these are secured loans and there is less overall risk of loss for the lender, no credit checks are common. One of the most popular types of title loans is one that uses a car as collateral called car title loans. Loan terms can vary significantly depending on your lender.

What is a credit check?

If you’ve ever heard of a “Soft check” or a “Hard pull” these refer to the two types of credit checks. When reviewing your credit score or applying for a new loan it’s crucial to know the difference between the two credit checks and how these checks can impact your score. Whether soft or hard, each is also considered a credit inquiry and they are ways to get a “credit rating” on you specifically.

Soft Checks or Soft Pulls

A soft check or soft pull occurs anytime you or a creditor “looks” at your credit score. Soft checks are important as they are the only type of credit check that does not impact your credit score. While a soft check won’t change your credit score, they are still listed on your credit report when performed by a lender.

Since soft checks don’t affect your credit score, many lending companies will pull this information to pre-approve customers that match their products. Employers also tend to use soft checks if they are pulling your credit for a job application. Interestingly, any time you check your score through a credit bureau or other service, you’re performing a soft check on yourself.

Hard Checks or Hard Pulls

Unlike soft checks, hard checks can impact your credit score. Hard checks are used by lenders to pull more in-depth information while making a final loan decision and are usually one of the last steps when applying and accepting a loan.

Each hard check can shave off up to 5 points from your credit score. When it comes to credit reporting, all hard checks within 45-days from each other are reported as the same credit check. Since hard checks are bundled in this way, you don’t need to worry about hurting your credit score when shopping around for better rates.

Since these types of credit checks have such an impact on your score, any hard pull requires your consent in order to be processed. It’s generally a good idea to review your credit report for new inquiries. If you see hard checks you don’t recognize, it’s a good idea to follow up with your bank and lender in order to prevent fraud.

Other credit checks

When people refer to credit scores, they’re almost always talking about your FICO credit score. The FICO credit score was introduced over 25 years ago in an effort to quantify risk based on a few variables. The exact formula for calculating this credit score is a closely guarded secret, however, repaying loans on time, payment history, and keeping debt small are some proven ways to increase your credit score.

As with most industries the credit reporting industry has seen rapid change in the past decade as new business and established companies seek to innovate on older techniques. Some of these alternative credit reporting companies, such as Clarity, are smaller branches of the three major bureaus. Others, like Innovis, have grown almost as large as the other bureaus. These alternative credit reporting companies use a collection of similar data as well as other less common data to compile a view on your creditworthiness.

What does a No-Credit check loan look like?

While the decision process for no credit check loans may differ between companies, most follow a similar roadmap. Lenders will generally need to: verify your identity, collect information on your financial health, assess the risk in lending money to you, and finally, make a lending decision based on their assessment. Let’s take a look at how this process works with an application with Possible.

Verify

In order to prevent fraud and identity theft, a lender will need to verify your identity before extending a new loan. This process usually involves a lender needing a driver’s license, social-security number, or other documents that can prove your identity.

At Possible, we require a state issued ID and a valid social security number in order to verify your identity with government records. We also ask for a selfie at the time of the application to make sure nobody else uses your information to apply.

Collect

After a lender knows who you are, they’ll need to collect information in order to make a lending decision. This is where the credit checks can happen. Your lender will leverage your credit score as a measure of your ability and willingness to repay the loan.

When applying for a Possible loan, you’ll link your bank accounts. Since we don’t look at your FICO score or a credit report, we rely on the information you give us. Our system is able to look at information such as your bank balance, income, and history of returned payments in order to give us a better idea of your financial health and creditworthiness.

Assess

Now that a lender has collected the information they need, they can begin the process of assessing the risk of your loan. Each lender has a different process for underwriting loans, each using and interpreting your information differently.

With a Possible loan, we look at your overall financial health to make sure our loans are able to help without adding financial burden. Factors such as your income and the number of other loans you have open help us avoid over-lending and doing more harm than good.

Decide

Once a lender has evaluated the risk of extending a new loan to a borrower, they decide on the amount of funds available to you. With a line of credit, this will be the total amount you can borrow while more structured loans will give you access to a set amount of funds. Short-term cash advances or payday loans will have a smaller amount of money available to you.

Possible loans are repaid through multiple installments. Once we have a better picture of your financial health, our algorithms help us determine the amount we can safely lend to you. We look at a variety of things like recent income and current bank balance before making a financing decision.

What are some Pros and Cons with no credit check loans?

While no credit check loans can be a helpful tool in building credit, it’s important to understand the strengths and weaknesses of the process before making a decision. 

Strengths of No credit check loans

• Your current credit score isn’t taken into account. If you have bad credit history or a lack of credit history, no-credit check loans can be a great entry point to building credit.
• Your credit score isn’t impacted by applying. With poor credit, it can be difficult to be approved for new loans. And with every hard check, your credit score can go down, a short-term financial issue.
• Better chances for approval. No credit check lenders usually have their own criteria for lending money. Payday lenders and other companies may take a look at a few high-impact factors such as your income and employment history, while still others will create a complex system to better understand your creditworthiness.

Weaknesses of no credit check loans

• No credit check loans, such as short-term loans and payday loans, tend to have much higher rates and fees than traditional loans. This is usually caused by the higher risk of lending. Depending on the company you work with, payday and short-term loan rates can vary between 100% to over 700% APR (annual percentage rate). The APR or annual percentage rate of a loan from Possible usually ranges from 150-200%.
• These loans tend to be smaller in dollar amount and last a shorter time frame. Since no credit check loans tend to be riskier, lenders usually extend smaller loans to be repaid within a few months with at most monthly payments. Balancing your debt and keeping track of your repayment schedule is important to stay out of a debt cycle. Since the payback periods tend to be shorter, individual payments tend to be larger. Some lenders will increase the amount of money available for use as you build repayment history.
• You need to research and understand how it works. There’s only one thing shared between types of no-credit check loans and that’s the lack of a credit check. It’s crucial to fully understand the terms of any loan you are applying for as well as researching the company you’ll be working with. While many companies offer no-credit and low-credit loans to help customers with bad credit to build credit history, predatory lenders also operate in this space, hoping to capture customers without much prior knowledge about lending. We started Possible to provide an alternative to traditional predatory payday lenders and give our customers access to cheaper, more flexible, and kinder loans that build long-term financial health.

What is a Credit-Builder Loan and How Do They Work

A credit builder loan is a loan where the amount you borrow is held in a bank account while you make payments, thereby building credit history. Credit-builder loans don’t require a good credit score so people with bad credit, poor credit or no credit history can apply and get approved. Because the amount you borrow is held in a bank account as collateral, the financial institution lending the money to you has no risk because it could simply collect the money in the bank account if you were to stop paying. On-time loan payments are reported to the three major credit bureaus: Experian, TransUnion, and Equifax, and at the end of the loan term, the lender will return to you the loan proceeds plus interest, if applicable. Therefore, credit builder loans can help improve your credit over time and save money consistently.

Basics of a credit builder loan

Many lenders will not require a credit check for a credit builder loan. However, lenders may use your banking history or other underwriting criteria to determine whether they will approve you for a credit builder loan. You may also need to provide the following information:

• Employment information
• Paystubs or proof of income
• Account balances
• Outstanding loan information

According to the Consumer Financial Protection Bureau (CFPB), credit builder loans typically range from $300 to $1,000 in size and is repaid over 6 to 24 months. When choosing a loan amount for your credit builder loan, consider your income and ability to repay the loan. Choose a smaller amount if you’re on a tight budget. Remember, both on-time and late payments are reported to the credit reporting bureaus so if you fail to pay your credit-builder loan, it undermines your credit building efforts.

The amount of interest and/or fees you pay on the loan varies by lender. At the end of the loan, some lenders return the interest together with the amount you borrowed. When choosing lenders, be sure to understand any interest charges, APR, the total fees you pay, and lender policies about changing loan payments and returning the interest.

A credit builder loan is not for everyone. If you don’t have the money to spare and have bad credit, borrowing using alternative options like payday loans or a Possible loan could be a better option. With a loan from Possible, you can receive money as well as build credit.

Where to get credit builder loans

Credit Unions. Many credit unions have credit builder loans. You can apply online or in person at your neighborhood credit union. Credit union loan amounts range from $300 to $1,000, interest averages 10% and term can be 1 year. Repayments are reported to the credit bureaus and 50% of interest may be refunded at the end of the term.

Banks. Local, regional, and national banks offer credit builder loans to establish credit as one of their products. For example, Wells Fargo allows for a Wells Fargo certificate of deposit (CD) or savings account to secure a loan or line of credit that you borrow. Payments are reported to Experian, TransUnion, and Equifax.

Self Lender. Based in Austin, Texas, Self Lender works with multiple banks and offers a credit builder account based on a certificate of deposit (CD) backed installment loan. Customers open a CD with a bank through Self Lender and the bank extends a line of credit for the same amount. Payments when made are reported to the credit bureaus. Loan amounts, fees, and terms vary and there may be an origination fee.

Lending Circles. Certain community organizations facilitate peer groups that help those within the group build credit. The peer group decides on a monthly payment and loan balance. The loans are usually interest-free with no fees and each member of the peer group pays the same monthly amount to a central account. Each month, a member of the peer group receives a loan in the agreed-upon loan balance and payments are reported to all three credit bureaus. You can look up lending circles in your area at Mission Asset Fund.

Process for a credit builder loan

1. Lender opens a savings account. Once the lender approves the application, the loan amount is set aside in a savings account for you. However, you will not have access to the account until you pay off the entire loan.
2. You start making payments. You will usually make equal monthly payments for the term of the loan, which can be 6 months up to 24 months depending on the lender.
3. Payments are reported to the credit bureaus. The lender will report your payments, whether on-time or late, to the three major credit bureaus: Experian, TransUnion, and Equifax each month. If you responsibly pay on time, you will build credit history and your score should increase. If not, your score may decrease, undermining the primary reason you are using the credit builder loan for.
4. Interest is charged throughout. APRs range between 6% and 16% depending on the lender. The APR may be slightly reduced by interest you earn on the certificate of deposit or savings account. In addition, many lenders will return a portion of the interest back to you when the loan is repaid.
5. Your loan term ends and the funds are returned to you. Once you have made all the payments on the loan, the lender will give you access to the certificate of deposit or savings account. You will be able to access the money for your own personal use.

Alternative to credit builder loans

Secured credit cards. A secured credit card requires you to place a refundable security deposit on your credit card. The refundable security deposit is the card’s credit limit and prevents you from spending more than you can repay on the credit card. Secured credit cards offer almost guaranteed approval because the issuer of the card uses the security deposit as collateral if you cannot pay your credit card bills and the outstanding credit card debt. Payments for secured credit cards, similar to unsecured credit cards, are reported to all three credit bureaus.

Possible loan. Possible has installment loans up to $500 that build credit. You can apply, get approved, and receive money in minutes through your smartphone. Because the loan is repaid in multiple installments over time, Possible reports to all three credit bureaus as loan principal and interest payments are paid. Compared to credit builder loans, a loan with Possible does not require money on hand to build credit. In fact, you can build credit and receive money at the same time.

Credit repair agencies. These companies typically review your credit report, address negative items, and negotiate with creditors about removing items on your credit report. The credit bureaus have 30 days to investigate and respond to your dispute. The total time it takes to repair your credit will vary depending on your disputes and your credit report. The costs of using a repair agencies can range from $35 for one deletion up to $750 or more. Some agencies will charge by the month instead. According to the Federal Trade Commission (FTC), credit repair scams are common so please verify your credit repair agency and steer away from scammers.

Credit repair counseling. Find a reputable credit repair counseling agency to help turn your financial situation around and build credit. One nonprofit debt counseling agency is the American Consumer Credit Counseling (ACCC) but there are many others out there. Costs of credit counseling should not exceed $50 and most legitimate credit repair counseling agencies should charge you little or nothing. Certain states have specific laws about credit counseling and managing debt.

Authorized user or co-signer. A parent or friend can make you an authorized user on a rewards credit card, allowing you to build credit by relying on the credit score of another individual. Paying the credit card will affect the credit history of those involved. Some credit cards charge fees for adding an authorized user. Adding a co-signer to your credit card, unsecured personal loan, or car can allow you to qualify for loans and products that you would otherwise not qualify for with your low credit. Both signers are obligated to repay the loan.

Benefits of Credit Builder Loans

• Pushes you to save money consistently. With a credit builder loan, you are essentially “depositing” money at regular intervals and at the end of the loan term, the funds are then returned to you.

• Approval is easier than other loan products like personal loans, student loans, other traditional loans or credit cards. Because a credit builder loan is secured by the cash in the bank account (secured loan), approval rates are significantly higher than other credit products.

• As you make payments on time, you will build payment history, an important part of credit history. The bank or financial institution will report payments to the credit bureaus, allowing you to build credit and hopefully improve your credit score.

• Interest is low compared to some other products. Not only does the APR tend to be lower than some other loans, you may receive a dividend or refund on a portion of the interest you paid.

Risks of Credit Builder Loans

• Credit builder loans are not free. You will pay interest on the loan and some financial institutions, such as Self Lender, charge a non-refundable administrative fee. You should read all the agreements and documentation related to your credit builder loan before borrowing the money.

• Late and missed payments can be reported to the credit bureaus which will hurt your credit score. Since one of the primary purposes of the credit builder loan is to build credit history and payment history, this can be frustrating. Keep track of when your payments are due to make sure they are paid on time.

• You are committing to a specific schedule and many financial institutions don’t have the flexibility of rescheduling payments. Properly budget the payments on your loan into your monthly budget so you save enough to successfully pay your credit builder loan. If you need payment flexibility, you can try a Possible loan which allows you to change the payment dates directly within their app with no fees.

Laws and Regulations for Credit Builder Loans

Credit builder loans are usually a combination of two products: a loan plus a savings account/CD.

A personal loan or a line of credit are common loans used for a credit builder loan. These loans have federal laws that govern it, such as the Fair Debt Collection Practices Act and the Truth in Lending Act. The Fair Debt Collection Practices Act by the Federal Trade Commission (FTC) governs debt collection practices and prohibits debt collection companies from using abusive, unfair or deceptive practices when collecting debts. The Truth in Lending Act by the Office of the Comptroller of the Currency (OCC) protects consumers from inaccurate and unfair lending and credit practices. Important aspects of this law include disclosure of the annual percentage rate (APR), terms of the loan, and total costs for borrowers. In addition to these federal laws, there are state usury laws that govern the amount of interest that can be charged on a loan.

A savings account and a certificate of deposit (CD) has a different set of laws that govern it. Federal Reserve Board Regulation D is a federal regulation that sets out reserve requirements for banks in the US. In the US, both savings accounts and CDs may be insured by the Federal Deposit Insurance Corporation (FDIC) for banks and the National Credit Union Administration (NCUA) for credit unions.

What if I can’t pay my credit builder loan?

Because all payments are reported, not just on-time payments, not paying a credit builder loan can hurt your credit score. With some financial institutions, there is a grace period beginning with the payment due date. For example, Self Lender has a 15 day grace period before they charge a late fee equivalent to 5% of your scheduled monthly payment.

Payments are reported late to the credit bureaus if you are past due by 30 days. In addition, the lender will likely recoup the amount it lent you plus penalties and fees by seizing funds from your savings account for the credit builder loan. This will cause negative entries in your credit report. If you expect to have trouble making any of your payments, work with your lender directly to figure out the best solution for you.

Final Take

Credit builder loans can be a great way to build credit and save money with little to no credit history.  Approval is easy, it’ll push you to save money, and you should improve your credit score as long as you pay on-time. However, plan ahead and don’t miss a payment because failing to pay your credit builder loan will really undermine your efforts.

These loans are not for everyone. If you’re looking to correct negative entries in your credit history, a credit counseling agency or a credit repair agency can help you do that. If you need to build credit and you’re lacking cash, a Possible loan can be a better solution to solve your immediate cash needs while building long-term credit history.