One of the qualifications in order to be able to get a loan these days is to have a good credit history. This can be a problem for some people because as time goes by, having a good credit history seems more difficult than ever. But did you know that there are some types of loans that do not require a credit check. One type of loan that does not re quire credit checks is the payday loan.
Credit Checks and Credit History
A credit check is the process which a lender undergoes in order to check the credit history of a consumer who is applying to become a borrower. The credit history is a record of the borrowing and payments of the potential borrower in the past. A low score would indicate that a borrower might have had some trouble handling and paying debts in the past. That would be taken as a sign by the lenders that a person is a high risk borrower.
Each country follows its own system of keeping track of a person’s credit history. In the United States, the System followed is the FICO scoring system is the one that’s followed in order to get the credit score of the individual or the company.
There are five factors that are used in the FICO scaling system. Here are those factors:
- Payment history
- Time in file
- Account Diversity
- Search for a New Credit
Payment history is the biggest single factor in determining the credit history of the consumer. It makes up 35% of the report. This is the record of how the consumer handled the payment of all past financial obligations. It would show any missed payments, default or debts that were transferred to collections. The most important thing for lenders is to see a regular payment for debts. Overpayments do not much of an impact.
The kind and amount of debt also plays an important part in determining the credit history of the consumer. The most usual type that is measured is revolving debt which refers to the usage of credit cards by the consumer. This makes up 30% of the total credit report. Time in file refers to the age of the file and also the average age of the accounts of the consumer. This makes up 15% of the whole credit score of the individual or the corporation.
It helps to have various types of accounts because Account Diversity makes up 10% of the total score. This is a good indicator to the lender because it is a sign that the consumer has experience in handling different financial products. That’s a sign of financial maturity which means that the person is a low risk borrower.
Search for a new credit refers to the number of inquiries made into the credit history of a consumer. A great number of inquiries mean that the consumer is always out to get some new loan, which in turn could mean that he is always in financial trouble. That’s why it helps to keep inquiries to a minimum. This makes up 10% of the report.
Why Credit Checks Are Important to Lenders
Lenders rely on credit checks as the best means for them in determining whether a particular consumer would turn out to be a low or a high risk borrower. This is not the only thing that lenders check when reviewing the application for cash loans. They would also consider the income of the person and the debt to income ratio. The income of course, is the amount of money that a person is making. The debt to income ratio on the other hand is the amount of money owed by a person when compared with what he or she is earning. A person could be earning a lot, but that would not mean anything if he/she owes a lot.
While credit checks are not the only things used by the lenders, these are still very important and it is one of the main reasons why many borrowers fail to get the money that they need.
No Credit Check Loans
One of the most common types of loan today that does not need any kind of credit check is the payday loan. The payday loan is a short term loan that is taken against the paycheck of an employee. In theory the purpose of this kind of loan is so that a consumer could stay afloat until the arrival of the next paycheck. About a 12 million Americans used this type of loan back 2010 alone and it is assumed that the yearly number has increased since then. One of the major reasons why a great number of people are using payday loans is because it does not require a credit check. Many of those who turn to it, are consumers with bad credit standings who do not have any other choice when it comes to getting a loan.
Characteristics of Payday Loans
Payday loans have other characteristics that make it attractive for many consumers aside from the fact that it does not require a credit check. Another major draw of cash advance loans is the speed of the processing involved. Most payday lenders can process an application within a day. That means a consumer can get the money that he/she is borrowing within 24 hours of application. Some lenders are taking that a step further by guaranteeing that they can process an application in hours.
Then there is the absence of any need for documentation or to send anything through fax. That reduces the amount of trouble involved in applying for a loan. The fact that the application is done online is also a major attraction to many consumers. All that they have to do now is to go online in order to borrow money. With all those characteristics, it is not surprising that millions or Americans are turning to it every year to make up for their financial shortage.
The Dangers of Using Payday Loans
Those qualities of payday loans which are drawing a lot of users each year can be misleading. Those characteristics hide the fact that payday loans can be dangerous for ordinary consumers. The main problem with payday loans is that it encourages being in debt, despite what the ads of the lenders are saying. The whole system of payday lending thrives on making sure that the borrowers stay in debt in perpetuity.
No One Can Afford it
With the kind of interests charged by payday lenders, not even the rich could handle it. The typical APR for a payday loan could be 300% to 400%. What’s worse is that it isn’t the rich who are using these loans but the poor people who do not have enough to pay for the basic necessities.
Rolling Over a Loan
Rolling over a payday loan means extending the terms of the loan, and this would usually mean until the next payday of the borrower. Some might think that this is a good thing for the borrower. In reality, this is what leads to trouble for most people who use online payday loans. This is because it encourages being constantly in debt.
You Might Keep on Borrowing
Another issue with payday loans is that it could become a habit. The ease of getting money could overshadow the fact that this kind of loan is very expensive. This is what’s causing many consumers to become habitual borrowers of payday loans. What’s even more alarming is that payday lenders are encouraging the behaviour because they can make more money from people who borrow more often.
It Can Ruin Your Credit
One irony about payday loans is that while it does not require a credit check, taking out one could ruin your credit standing. This is the kind of loan that will not look good on your credit report. When lenders see that you have used payday loans in the past, they would think that you were in very desperate financial circumstances. If you want to build up your credit, then stay away from this loan.
It Can Cause You to Make Worse Moves
There are actually worse things that you can do over taking out a payday loan. One such move would be to close your bank account in the hopes that the lenders would not have access to your money and that they would just quit. That would be wishful thinking because lenders would go to great lengths to make sure that you pay them back.
Using No Credit Check Payday Loans
If you have a bad credit should you resort to the use of payday loans to meet your financial needs? That would depend on your situation and how well you understand what payday loans would entail. If you know that you need to pay it back as soon as you can and you are only planning on using it for an emergency financial need, then there’s no problem in using it.