For most consumers there is no shortage of ways to borrow money. But many types of loans, including credit card and mortgages, require a credit check and aren't available to borrowers with poor credit. Some loans don't use credit checks which means they're available to more borrowers, but often at a high cost.
Personal loans that don't require a credit check are known as secured loans. This means they use your personal property or some other asset to secure the money you borrow. If you default on the loan by missing a payment, the lender has the legal right to the property that secures the loan. This reduces the risk to lenders and allows them to make loans even to borrowers with poor credit.
There are several types of loans that don't rely on credit checks. One such loan is an auto title loan, also known as a pink slip loan. This is a cash loan that uses your vehicle, which you must own outright, as collateral. Another no-credit-check loan is a payday loan, which relies on your upcoming paychecks to provide security. It also delivers an up-front cash payment that you must pay off over a set time, with interest.
Borrowers with poor credit can use no-credit-check loans for any purposes they choose. However, the size of these loans limits their usefulness. For example, an auto title loan will only deliver cash up to a limit defined by the value of the vehicle. Payday lenders likewise use a borrower's wage rate to determine how much to lend. Some uses for these loans include paying off medical bills and paying rent or utility bills in an emergency situation.
The Federal Trade Commission notes the dangers of no-credit-check loans such as payday loans. While acknowledging their appeal to borrowers, the commission also cites the fees and high interest rates that accompany payday loans as a source of danger. Like payday loans, auto title loans charge high interest rates and may include large late fees that make them even more costly to pay off when borrowers struggle. This can result in the loss of the vehicle or garnished wages, making a personal financial crisis worse instead of better.