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Why You Should Avoid No-Credit-Check Loans – Forbes Advisor



Editorial Note: Forbes may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations.

When you need money fast and have damaged credit, ads for no-credit-check loans can be tempting. They may seem like the perfect solution to your financial problems, but no-credit-check loans are very expensive and can leave you in a worse position than you started.

Here’s why no-credit-check loans are dangerous, and several better types of personal loans and options you can use if you need cash.

What Is a No-credit-check Loan?

A no-credit-check loan is exactly what it sounds like. Most loans require a credit check so lenders can see how well you’ve managed past debt. They then use this information to help qualify you for a loan and establish your interest rate.

No-credit-check loans, on the other hand, are given out based on your ability to repay the loan. For instance, lenders can check your bank account statements or past pay stubs to see how much you earn with each paycheck and how much loan you can afford.

Some no-credit-check lenders also require you to pledge collateral—a personal asset you use to secure a loan and one the lender can repossess if you fail to meet the repayment terms. For example, you might need to leave something of value with a pawn shop to get a pawn shop loan. You’ll then get your item back when you repay the loan. Auto title loans are another type of no-credit-check loan where you’ll leave your car’s title (and possibly even a set of keys) with the lender until you pay off the loan.

Who Offers No-credit-check Personal Loans?

No-credit-check loans aren’t as common as traditional loans; however, you can still apply for one through various institutions, including:

  • Payday loan stores. This is what most people think of when they hear no-credit-check personal loan. Payday loans generally last until your next paycheck, charge extremely high interest rates and offer you the ability to roll your current loan into a new one if you can’t pay (for an even higher price, of course).
  • Auto title lenders. Lenders who trade you an expensive loan for your car’s title can be found online, or they may have storefronts in your community.
  • Online lenders. Some online lenders don’t specifically offer payday loans or auto title loans, but they still offer no-credit-check loans.
  • Pawn shops. Pawn shops sell items, and they give out short-term pawn loans too. They’ll usually give you a ticket with your cash, which you’ll need when you repay the loan in order to get your pawned item back.

Why No-credit-check Personal Loans Are Dangerous

Although no-credit-check personal loans are convenient, they can hold you back or even be dangerous in some cases. Here are four things you should know before applying for one.

1. They’re Extremely Expensive

If you don’t have great credit, you’ll have to pay more for any loan than someone with better credit, unfortunately. If you’re comparing no-credit-check loans with regular loans for bad credit, though, it’s a difference of whether you want a high rate, or a sky-high rate.

Many loans for bad credit charge APRs of around 30%. With payday loans, for example, you’ll often be charged around 400% APR—over 10 times as high. Those numbers can seem abstract, so it’s helpful to see what it actually means for your wallet at the end of the day. Here are what three different $500 loans will cost if you pay them back over a six-month period:

The difference between having good credit and relying on payday loans in this case is $706.25 more in interest—more than you even borrowed in the first place. It’s high costs like these that many people consider criminal, which is why some states prohibit payday loans.

Because payday loans only last until your next payday, term lengths are generally about two weeks, not six months. However, there are cases where you can end up paying that high APR for even longer (even six months or more as in the above example), which brings us to our next point.

2. They Can Trap You In Debt

Payday loan lenders know these loans are expensive, and that there’s a decent chance you won’t be able to pay. So they offer a handy trick: If you can’t pay your loan back, you can roll it up into a new loan, so you’ll essentially get an extension for an additional fee.

This means you’ll have an even bigger hurdle to clear next time. And if you weren’t able to pay it off the first time, it’s even less likely you’ll be able to two weeks down the road when it’s a larger balance. According to a study from the Consumer Financial Protection Bureau, “The majority of all payday loans are made to borrowers who renew their loans so many times that they end up paying more in fees than the amount of money they originally borrowed.”

3. They Don’t Build Credit

Another way that payday loans and other no-credit-check loans trap you into a debt cycle is that they don’t help you build credit. Since they don’t check your credit, they generally don’t report your payments (even on-time ones) to the credit bureaus.

Since you’re not building credit, this means that you’re more likely to have to rely on no-credit-check lenders going forward, too. It’s another way they make you more reliant on them, versus being able to apply for loans that you can pay off more easily in the future.

4. They’re More Likely To Be Scams

Not all no-credit-check loans are scams—or at least true scams, in the sense that they rob you of your money right away. But, since people who rely on no-credit-check loans are often more desperate in the first place, they’re commonly targeted by thieves advertising these products.

To safeguard against this, it’s a good idea to never send someone any money before you receive yours. Thieves using these scams also commonly ask for unusual forms of payment, as opposed to using collateral, before they grant you a loan, such as a prepaid debit card. And if you think you’ve been a victim of a scam, there are ways to protect yourself or resolve it.

Alternatives to No-credit-check loans

Lenders that offer no-credit-check loans earn their living by hoping you don’t do your research to find other options. However, you’re never pinned in, and you do have other choices, including:

  • Saving up and building credit. This isn’t a choice for everyone, but if you don’t need the money immediately, it’s better to save up and build your credit first. Not all credit-building options take a long time, and by saving, you can earn interest instead of paying it to someone else.
  • Seeking help from a charity. If you’re having trouble paying your bills, you don’t have to resort to a no-credit-check loan. There are a lot of options around the country that can help, and you can use to get connected to them.
  • Getting help from a credit counselor. The nonprofit National Foundation for Credit Counseling is another resource that offers assistance from a live counselor in helping to find a solution for your financial and credit problems. This is a low-cost, or even free, service.
  • Utilizing payday loan alternatives. Many credit unions offer payday loan alternatives, which are short-term loans for a small amount of money but at an affordable rate. You’ll need to join a credit union to be eligible to apply, so check to see if any credit unions in your community offer this option first.
  • Applying for secured personal loans. Although title loans and payday loans are technically secured, you can usually find secured loans from other lenders at cheaper rates.
  • Finding a co-signer. If you have a friend or family member with better credit and who trusts you, you can consider asking them to co-sign on your loan for you.

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Bad Credit

Loans Bad Credit Online – Reforming India’s deposit insurance scheme | Fintech Zoom



The government’s incentive to step in and bail out depositors when banks fail is clear from past experience.

By Anusha Chari & Amiyatosh Purnanandam

The failure of the Punjab and Maharashtra Co-operative Bank (PMC) in September 2019 shone a light on the limitations of India’s deposit insurance system. With over Rs 11,000 crore in deposits, PMC bank was one of the largest co-op banks. That the Deposit Insurance and Credit Guarantee Corporation (DICGC) insurance covered depositors, provided little solace when the realisation hit that the insurance amounted to a mere Rs 1 lakh per deposit.

The predicament of PMC depositors is, unfortunately, not an anomaly. Several bank failures over the years have severely strained RBI and central government resources. While co-operative banks account for a predominant share of failures, other prime examples include the Global Trust Bank and Yes Bank failures. These failures entail a direct cost to the taxpayer—the DICGC payment or a government bailout. More importantly, bank failures impose long-term indirect costs. They erode depositor confidence and threaten financial stability, presenting an urgent need for deposit insurance reform in the country.

A sound deposit insurance system requires balancing two opposing forces: maintaining depositor confidence while minimising deposit insurance’s direct and indirect costs. At one extreme, the regulator can insure all the deposits, which will undoubtedly strengthen depositor confidence. But such a system would be very expensive.

A bank with full deposit insurance has minimal incentive to be prudent while making loans. Taxpayers bear the losses in the eventuality that risky loans go bad. Depositors also have little incentive to be careful. They can simply make deposits in the banks offering high interest rates regardless of the risks these banks take on the lending side.

Boosting depositor confidence and reducing direct and indirect costs require careful structuring of both the quantity and pricing of deposit insurance. Some relatively quick and straightforward fixes could help alleviate the public’s mistrust while improving the deposit insurance framework’s efficiency.

India has made some progress on this front over the last couple of years. First, the insurance limit increased to `5 lakh in 2020. Second, the 2021 Union Budget amended the DICGC Act of 1961, allowing the immediate withdrawal of insured deposits without waiting for complete resolution. These are very welcome moves. Several additional steps could bring India’s deposit insurance system in line with best practices around the world. Even with the increased coverage limit, India remains an outlier, as the accompanying graphic shows.

The government’s incentive to step in and bail out depositors when banks fail is clear from past experience. However, these ex-post bailouts are costly. The bailout process also tends to be long, complicated, and uncertain, further eroding depositor confidence in the banking system. A better alternative would be to increase the deposit insurance limit substantially and, at the same time, charge the insured banks a risk-based premium for this insurance. Under the current flat-fee based system, the SBI pays144 the same premium to the DICGC—12 paise per 100 rupees of insured deposits—as does any other bank!

A risk-based approach will achieve two objectives. First, it will ensure that the deposit insurance fund of the DICGC has sufficient funds to make quick and timely repayments to depositors. Second, the risk-based premia will curb excessive risk-taking by banks, given that they will be required to pay a higher cost for taking on risk.

India is not alone in trying to address the issue of improving the efficiency of deposit insurance. The Federal Deposit Insurance Corporation (FDIC) recognizes that the regulatory framework governing deposit insurance is far from perfect and the United States is moving towards risk-based premia. The concept is similar to pricing car insurance premia according to the risk profile of the driver. The FDIC computes deposit insurance premia based on factors such as the bank’s capital position, asset quality, earnings, liquidity positions, and the types of deposits.

In India, too, banks can be placed into buckets or tiers along these different dimensions. The deposit premium can depend on these factors. It is easy to see that a bank with a worsening capital position and a high NPA ratio should pay a higher deposit insurance premium than a well-capitalized bank with a healthy lending portfolio. The idea is not dissimilar to a risky driver paying more for car insurance than a safe driver.

Risk-sensitive pricing can go hand-in-hand with the increase in the insured deposit coverage limits bringing India in line with its emerging market peers. In a credit-hungry country like India, these moves would build depositor confidence, possibly increasing the volume of deposits and achieving the happy result of the banking system channeling more savings to productive use.

Chari is professor of economics and finance, and director of the Modern Indian Studies Initiative, University of North Carolina at Chapel Hill and Purnanandam is the Michael Stark Professor of Finance at the Ross School of Business, University of Michigan

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5 Signs You’re Not Ready to Own a Home, According to a CFP



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The housing market has boomed over the last year, despite a global pandemic and millions of Americans struggling to make ends meet. 

Many people are spending less on entertainment, clothing, travel, and other discretionary purchases during COVID. Federal student loan borrowers have seen temporary relief from their loan payments. These expenses will most likely rise again after the pandemic, and many people who committed to a new home with a large mortgage will struggle to keep up. 

I often speak with clients and prospective clients who want to buy a home before they have a strong financial foundation. Buying a home is not only one of the largest purchases you’ll make in your lifetime, but it’s also a huge commitment that’s extremely hard to undo if you have buyer’s remorse

It’s important to make a thoughtful, informed decision when it comes to a home purchase. Before you take the plunge into homeownership, check for these signs that you’re not quite ready to buy. 

1. You have credit card debt

Credit card debt can be a drain on your monthly budget, and when combined with student loans and a car loan, it can lead to high levels of stress. 

Generally, more debt means higher fixed expenses and little opportunity to save for long-term financial goals. Your financial situation will only get worse with the addition of a mortgage. I always recommend that clients be free of credit card or other high-interest debt before they consider buying a home. 

To rid yourself of credit card debt, take some time to get a good handle on your cash flow. Take an inventory of your spending over the last six to 12 months and see where you can cut back. From there, develop a realistic budget that includes aggressive payments to your credit cards. 

There are several strategies to help you knock out credit card debt fast. Regardless of the method you choose, stick with the plan and track your progress along the way. Once you pay off your credit cards, you can allocate your debt payments to savings, which can help you avoid this situation in the future.  

2. You have bad credit

Bad credit is not only a sign that you may not be ready to take on a mortgage, it can also signal a high risk to

mortgage lenders
. A high-risk status results in higher interest rates and more strict requirements to qualify for a loan. A mortgage is one of the largest loans you’ll take out in your lifetime, and if you get behind on payments, you could lose your home. 

Just as with credit card debt, bad credit could be a result of past financial mistakes. Dedicating the time to repair bad credit and improve your credit score will help you beyond purchasing your dream home. 

Start by pulling a recent credit report from each of the three credit bureaus so you can review it for errors. Dispute any errors, address past-due accounts, and bring your overall debt balances down. It’s helpful to learn what has a negative effect on your credit score so you can avoid these mistakes in the future. 

3. You don’t have an emergency fund (or an inadequate one)

If you’re unable to save for a rainy day, you probably don’t have enough money to buy a house. Owning a home is a big responsibility, and unexpected expenses pop up all the time. In addition, you could lose your job, have a medical emergency, or another unexpected expense unrelated to the home. Maintaining an emergency fund is a good sign that you have discipline and are prepared for the responsibility of homeownership.

Many financial experts recommend saving at least six months of living expenses in an emergency fund. If you have variable income, own a business, or own a house, you should save more. To build an emergency fund, set money aside from each paycheck and automate transfers to make the process easier. Give your emergency fund a boost when you receive lump sums such as bonuses or tax refunds. Start by saving one month of living expenses and build from there. 

4. You don’t have separate savings for your home

I always advise clients to set aside savings for a home in addition to an emergency fund. It’s a bad idea to start homeownership with no savings. Whether you have unexpected expenses related or unrelated to the home, having no emergency fund after a home purchase will lead to unnecessary stress — and possibly more debt. 

When purchasing a home, you’re responsible for a down payment and closing costs. While a 20% down payment is ideal to avoid private mortgage insurance, a down payment of at least 3.5% is typically required. Closing costs can range from 2 to 5% of the home’s value. 

Also, you will have moving costs, costs to spruce up your new place (like new furniture or light cosmetic updates), and any initial maintenance and repairs. Be sure to budget for these items to know how much to save on top of your emergency fund. It doesn’t hurt to boost your emergency fund, too, in preparation for homeownership. 

5. You have a low savings rate

It’s much easier to develop good savings habits before you have a lot of responsibilities. To get on track for financial independence, several studies show that you should save at least 15% of your income. The longer you wait, the more you’ll need to save. 

If your savings rate is low before you purchase a home, it will most likely worsen after becoming a homeowner. Even if your mortgage is similar to your rent, ongoing maintenance and repairs, higher utilities, and homeowners association fees can wreak havoc on your budget. 

Take a look at your current savings rate and see if you’re on track for financial independence. If you’re saving less than 15 to 20% of your income, work to improve your savings rate before you consider buying a home. A strong savings habit can help you build your home savings fund faster and ensure that a home purchase doesn’t impede your long-term financial goals. Finally, understand how much house you can afford so you can avoid being house poor. 

Buying a home can be rewarding, and when done the right way, it’s a way to build wealth. Before you decide to buy a home, it’s important to understand your numbers and ensure that you’re ready for the commitment. Without preparation, your dream home could be detrimental to your long-term financial goals.

Chloe A. Moore, CFP, is the founder of Financial Staples, a virtual, fee-only financial planning firm based in Atlanta, Georgia and serving clients nationwide.

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Bad Credit

What Credit Score Do I Need for a Car Loan?



Beware these car loan mistakes

Regardless of whether you have excellent credit, terrible credit, or you’re somewhere in between, there are a few potentially-costly mistakes that are important to avoid.

  1. Long-term loans. While the industry standard used to be 48- and 60-month loan options, 72-month and longer terms are now common. I’ve even seen 96-month (eight-year) loan terms. Auto dealers use these long terms to lower monthly payments and allow buyers to qualify for more expensive vehicles. The problem: Stretching a loan out can dramatically increase your interest cost. For example, a $30,000 car loan at 8% interest for 60 months will cost you $6,498 in total interest. The same size loan with the same interest rate for 84 months would cost $9,277 in interest. Long-term loans are helpful for borrowers who can’t afford the monthly payments of a short-term loan — but a long-term loan shouldn’t be your first choice.
  2. The “monthly payment trap.” Car salespeople like to ask you how much you’re looking to spend per month. Under no circumstances should you answer this question. This effectively gives permission to charge you as much as they want in interest (and for the car itself), as long as the monthly payment is within your limit. The price of the vehicle, price of your trade-in, and the interest rate on your loan should be three separate negotiations.
  3. Rolling your existing car loan into your new one. You may see advertisements that say something like “we’ll pay off your trade, no matter how much you owe.” Well, if the value of your trade is less than the amount you owe, many finance companies will add the difference to your new car loan. This is how people end up with a $35,000 loan for a $30,000 car — avoid this type of situation at all costs.
  4. Overpriced add-ons. Salespeople, especially in the finance department, love to try and upsell you on these. When I bought my 2013 Chevy Camaro, the dealership’s finance manager offered to sell me an upholstery treatment for $12 per month added to my loan’s payment — that’s a total of $720 on a 60-month loan. I said no, only to learn that it had already been installed in the car, and they were going to give it to me whether I paid for it or not. Needless to say, I’ll never do business with that dealership again.

Perhaps the most important suggestion I can give you, especially if you have so-so credit, is to shop around for your next car loan. You may be surprised at the dramatic difference in offers you get.

Many people make the mistake of accepting the first loan offer they get (usually from the dealership). It’s also a smart idea to get a pre-approval from your bank as well as from a couple of other lenders. Online lenders and credit unions tend to be excellent sources for low-cost loan options. Not only are you likely to find the cheapest rate this way, but you’ll then have a pre-approval letter to take to the dealership with you.

The best part is that applying for a few auto loans won’t hurt your credit. The FICO credit scoring formula specifically allows for rate shopping. All inquiries for an auto loan or mortgage that occur within a 45-day period are treated as a single inquiry for scoring purposes. In other words, whether you apply for one car loan or 10, it will have the exact same impact on your credit score.

Buy a car now or work on your credit?

The bottom line is that there is no set minimum FICO® Score to get a car loan. There’s actually a good chance that you can get approved for an auto loan no matter how bad your credit is.

Having said that, subprime and deep-subprime auto loans can be extremely expensive, so just because you can get a car loan with bad credit doesn’t necessarily mean you should. The savings from a moderate score increase can be substantial, so it could be a smarter idea to wait for a bit and work on rebuilding your credit before buying your next car.

Still have questions?

Here are some other questions we’ve answered:

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