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.
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.
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.
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.
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.