If you think about your credit score as the holy grail of getting a loan, you could be surprised that there are some lenders crazy enough not to care. At least, this is the impression they give at first since they require no credit checks.
How is this possible?
The simple answer is math and risk management. When a lender doesn’t ask you for your documents, it doesn’t mean they don’t care. It’s only a matter of assessing and hedging their maximum loss through the interest rate they charge from you and other clients. It’s like in the gambling business. The House never loses. You can, therefore, expect a high-interest rate and other compromises.
Why is this possible?
The simple answer to this is that people care more about building their credit score instead of tricking the bank. That’s the reason why some credit institutions don’t care about the credit score. Also, for the borrower, the immediate advantage of getting away with a small amount of money is negligible compared to the long-run damage made to the credit score. Also, most of the people who qualify for a no-document loan already have a damaged score; they can’t afford to get even deeper into trouble.
It sounds too good to be true
Don’t plan that Disneyland vacation just yet, there are some things to consider when getting a loan without a credit check. First of all, the amount is small, usually between $100 and $1500, something that even most friends would lend you without asking for papers. They are minimizing their losses as much as possible and covering bad clients from the interest rate charged from the others.
Next, the interest rate for this can be insane, up to 75%, which means that you have to give back almost as much as you borrow. This is the reason you should only get a loan like this if you have a strict emergency and do your best to get rid of it ASAP.
Also, be aware that some of these loans qualify as payday loans, which means that the repayment schedule varies between 14 and 30 days. Depending on the terms, these could be withdrawn automatically from your paycheck, which means that you need to plan for this spending so that you are not left broke.
So, should you get that $500 just to give back around $800? To such a question only a bit of strategy can answer. If you want to pay a bill before it becomes outstanding and hurts your score even more, it could be the right thing to do. Also, if your health or that of a loved one depends on paying some medical bills, the choice is obvious.
However, you should think it over if you are only in love with that new pair of shoes and you think your wardrobe could use an uplift. These types of credit should be put behind a “break in case of emergency” window.
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