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How Do No Credit Check Loans Work?
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Our entire modern financial world is run on credit. However, building and maintaining a high credit score can be a serious challenge to many people, most notably the young and inexperienced. The lure of quick and easy access to money and purchasing power can lead many to make rash decisions that have long lasting consequences.
Worse still, sudden and unexpected life changes can create a domino effect, leading events to quickly spiral out of control leaving credit scores and bank accounts at a fraction of their former levels. Even someone with excellent credit history and a great score can unexpectedly find themselves out of work, or struggling with unanticipated medical bills. There are many reasons why people find themselves stuck in a low credit crisis.
But life keeps on happening. Car parts wear out and break down. Air conditioning units end up needing repairs. The kids need school clothes and lunches every day. Where do people with low credit turn when they absolutely need that money7
While there are often other options available, more and more people are turning to no credit check loans to get the funds they need to make it from paycheck to paycheck. The easy road isn’t always the best, though. Often, the quick solution carries with it challenges that may not be apparent immediately, but can create even further complications to a person’s credit history later.
It is imperative that anybody seeking to improve or recover their credit score do diligent research, understand the terms and consequences of each loan and line of credit, and to recognize the manner in which their credit scores are calculated. Knowledge is power, and credit is leverage. Here are the facts.
No Credit Check Loan Process
When someone applies for a loan, most creditors review that person’s credit history and score to help determine how much risk they are taking on by lending that money. Credit scores are calculated using several different criteria. Paying bills on time, the length of time accounts are open, and the ratio of utilized to available credit a person has are all part of the equation.
A low credit score can create several challenges to someone who needs a quick influx of money. Advertising and money lenders work hard to offer no credit check loans as a quick and convenient solution for these situations. Payday advance loans capitalize on this perception. This is how they work.
No credit check loans offer fast approval, often giving a person the opportunity to walk away with money in hand the same day they apply. These loans are generally for sums as low as $50 and as high as $1,000. Finally, loans of this nature don’t check your credit history, so the inquiry won’t adversely affect your score.
There are considerable risks associated with these types of loans, however. They often come with incredibly high interest rates, sometimes above 100% of the principal initially borrowed. These types of loans can trap borrowers into a series of payments that pay more against the accruing interest than they do against the principal, creating a cycle that is difficult for most people to ever repay.
Lenders may request or require direct access to a borrower’s bank account, under the pretense of being able to withdraw monthly payments. This is a recipe for financial disaster. Some even encourage their customers to take a on a second loan in order to repay the first.
No credit check loans are a double edged sword. While they do not make inquiries that negatively affect one’s credit score, they also do not report successful or timely payments to these three credit bureaus. This means a borrower’s credit score won’t go up by using them.
Conversely, if a borrower defaults on a no credit check loan, the creditor can sell the debt to a collection agency. These agencies then report those delinquencies to the credit bureaus, leading to a drop in that borrower’s credit rating. So, while a no credit check loan cannot help a borrower’s credit score, it can absolutely hurt it.
Alternate Lending Opportunities for Low Credit Scores
Thankfully, there are options available even for those suffering from a low credit score. With diligence and careful planning, not only can a borrower find the funds they need in a timely manner, but they can begin the process of improving their credit score.
- Online Lenders
- Cosigned Loans
- Cash Advance
- Collateral Loans
- Credit Unions
One option is to go online. There are lenders who offer personal loans to borrowers with low credit scores or little history. Even at a score of below 600, people needing funds can receive upwards of $5,000 to help with their expenses.
These creditors will do a credit check, but often use what is known as a “soft pull”, which doesn’t affect the potential borrower’s credit score. This can be an effective method of obtaining money with fewer dangers than those offered by a payday advance
A family member or close friend who has a good credit score might also be willing to cosign a loan. This requires that the other person accept a considerable amount of risk, however. If the borrower fails to repay the loan according to the terms, then the cosigner is held legally and financially responsible for the debt.
It is critical to have a clear and explicit repayment schedule in place for paying off the loan, otherwise the credit score and credit history of the cosigner might suffer. These arrangements, when handled properly can provide a better interest rate and help to recover the borrower’s credit score as the debt is paid off.
If the borrower already has an active credit card, another possible option is to take out a cash advance against the credit line. Typically this money is borrowed at a higher interest rate than that of purchases made against the card, but often it is still substantially less expensive than a no credit check loan.
If the borrower does not have a credit card already, there are still creditors that will provide them. A hard credit check is required, and these cards typically carry a higher interest rate, but there are options available.
Sometimes, owning something of value can be held as security against a loan – for example, a vehicle. In this case, the lender provides the funds and holds the title of the collateral until the borrower repays the loan.
This option should only be taken when there is a clear and specific expected income with which the borrower can pay back the loan. If the borrower fails to pay according to the terms, they do stand the very real chance of losing that item or vehicle.
Probably one of the best options for short term loans is a credit union. With more lenient guidelines and reasonable rates, these institutions typically offer loans of $500 or more to their members. This allows them to be paid back on a schedule that is practical and realistic.
Federal credit union loans have a maximum limit of 18% interest, and can sometimes be customized to fit within the needs and restrictions of the borrower. They have a vested interest in their borrowers’ success, so are more often willing to work to make loans feasible.
Coming Back From Credit Crisis
No matter which method a borrower chooses, once the funds are in hand and the crisis has been averted there is still the matter of rebuilding that compromised credit score. A higher credit score and stronger credit history greatly increases the number and quality of options for borrowers. Lower interest rates and more flexible terms become possible and readily available to those who practice these simple steps.
First, it is imperative that borrowers pay off all their bills on time and in full, on or before they date they are due each billing cycle. Typically, this is monthly, but different loans have different terms. Failing to do so can lead to late fees and increased interest rates.
Also, it is crucial to thoroughly check one’s credit report to ensure accurate reporting. A free copy of the report is available once every year through each of the three credit agencies. Make sure to challenge and dispute any discrepancies or errors within the report.
A person should carefully monitor the ratio of their revolving debt to their total available credit, keeping it lower than 30%. The more credit available, the less risk a lender feels when offering the borrower a loan.
A significant factor in credit score is the age of a borrower’s credit history. It is simple enough to improve this but keeping old loan accounts and credit cards open and active. While paying off and closing down old accounts sounds like a smart move, this can actually have a seriously negative impact on a person’s credit score.
Ironically, opening a new credit card or line of credit also helps. It increases the amount of available credit a person has compared to their total active debt, thereby lowering the percentage of revolving debt one has.
Finally, contact lenders that have been charged off or already sent to collections. Getting in touch with these agencies and companies to request settlement can get the charge off removed from a person’s credit report for a fraction of the original debt owed.
While it may seem like a long and challenging road, if a borrower is careful and diligent they can indeed discover that there is life after debt.
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