For bad credit loan-seekers, borrowing money is anything but simple. Traditionally, lenders want to work with good credit scores of around 650 or above. If you have a score below that figure but are lucky enough to get approved, odds are your charges will be much higher. More than likely, though, you’ll flat out be denied a loan. To add insult to injury, most lenders will make a hard inquiry on your score before they turn you away. You’re left with a worse score, no loan, and a lot of wasted time. Enter the lenders who offer unsecured personal loans with guaranteed approval.
On the surface, these offers are tempting. Common ads you’ll see showcase things like, “Guaranteed approval for a loan!” and “No credit check necessary!” It sounds perfect, and that’s why it’s so dangerous. In this post, we’ll discuss what guaranteed approval loans usually entail, the dangers that lenders don’t want you to know about, and the hidden cost of accepting one of these high-risk loans.
What Makes Guaranteed Approval Loans Different?
You might be wondering if a guaranteed approval loan is the same as any other type of loan. In the technical sense: yes, it’s exactly the same. You reach out to the lender, fill out your application, sign a contract, get your money, then start making payments. But guaranteed approval loans have several key differences intended to make them very appealing to people seeking unsecured personal loans for bad credit.
They Usually Keep Their Promise of Guaranteeing Your Approval
In case you thought it might be a lie: typically, no. In the majority of cases, a lender who advertises guaranteed loans will, in fact, deliver on that promise. The only exceptions to this rule are if you can’t legally endenture yourself to a loan, don’t have a source of income, or don’t have a bank account. A 15-year-old without a job or a bank account can’t just waltz up and get a loan. Any type of money lender wants to know that you have the potential to pay money down on your debt.
That being said, there’s no such thing as a 100% guaranteed loan. Even if everything lines up, any lender can willfully decline to work with you for any reason they choose. It’s their money after all. You may make some money, but if you don’t make enough to afford the minimum offers available, lenders can still turn you down. The promise of guaranteed approval is made on the presumption that you have a job, make enough to afford the loan, and can sign for the loan yourself. More than anything, it’s an attention-grabber to get you to visit their site or storefront.
They Do Not Check Credit Scores
Another promise that guaranteed approval lenders usually deliver on is to not check your credit score to grant approval. Since they know banks and traditional lenders almost always do, it’s a selling point to lure you in. Numerous hard inquiries on a person’s credit history can quickly lead to a credit score dropping severely. For people who already have a bad score, this is completely out of the question.
However, be aware that no credit check doesn’t mean any risk to your credit. As we’ll discuss later, guaranteed approval loans can, and very likely will, have a very negative impact on your credit rating.
They Tend to Fund Loans Very Quickly
One of the biggest selling points that guaranteed lenders use to draw people is the promise of getting their money fast. Most of the time, that is indeed the case. On average, guaranteed approval lenders can approve and fund your request in a matter of minutes. At most, you may only be waiting a day or two to get your money.
Again, this sounds great in theory, but there’s a cost. People with bad credit who are desperate for money often focus on how quickly they’ll get their loan. Guaranteed approval lenders are counting on that, and will turn it against you, as you’ll see later.
Who Offers Guaranteed Approval Loans?
The short answer is that there are thousands of lenders who offer guaranteed approval loans. Before I typed that last sentence, I did a search for “guaranteed approval loans” to check. Google returned over 21,600,000 results. A better question to ask is what types of loans typically advertise guaranteed approval. Technically, lenders can provide any type of loan and still offer “guaranteed approval,” but in general, these are the types most commonly associated.
These are loans that offer relatively small amounts over a very short amount of time. Limits typically range up to about $500 and have to be paid back within two to four weeks. When you take a payday loan, you write a check for the full amount you borrowed, plus interest, and annotate the date your final repayment is due on the check. Your check is left with the lender, and if you don’t pay back your loan by the due date, they deposit the check. Typically, lenders will intentionally make their due dates on the same day your next paycheck is deposited, hence the name. While payday loans are considered a type of uncollateralized debt, your check, in a way, acts as a kind of collateral, so this isn’t a fair classification. Payday loans are also sometimes referred to as cash advance loans.
Title loans feature many of the same characteristics as a payday loan, with one important difference. While your postdated check is what gets you access to money with payday loans, with title loans, it’s your car title. Instead of cashing a check, if you default, the lender has the right to seize your vehicle. Otherwise, fees, interest rates, and timelines tend to be very similar to what you’d find with a payday loan. Title lenders will only offer guarantees to people who own the title to their vehicle and aren’t paying for an automobile loan. Title loans are categorized as secured loans because they require your vehicle to serve as collateral.
This is the newest addition to this list, but it works much the same way as a payday loan. The main difference is that these loans are processed completely via txt message on your mobile device. You request an amount of money via txt. Your terms are sent for you to review. If you agree, the funds are deposited directly into your account. On the date of your next scheduled paycheck, the entire amount you borrowed, plus interest, is deducted from your account.
So What’s So Dangerous About Guaranteed Approval Loans?
What do all three of the loan types I described above have in common? They’re all extremely dangerous. I’ve been hinting at that fact throughout this post, and I’ll explain what I mean below.
Their Main Objective is to Keep You Paying
The first thing to understand about guaranteed approval loans is that they aren’t designed to be fair. Instead, they’re designed to be so difficult to repay that you not only can’t pay them on time but need an additional loan to afford the first. The specific methods used to spring this trap include:
- Small limits on the amount you can borrow
- Short repayment timelines
- Extremely high fees and APRs
- The language on your contract that’s difficult to understand
You’re Limited in How Much You Can Borrow
I mentioned this earlier when I described payday loans but I want to emphasize it again here: you will not receive much money if you take out a guaranteed approval loan. There are two reasons why this is the case.
First and foremost, many states regulate the amount that payday and title lenders can loan out at a time. They do this to protect borrowers from taking out so much money that they couldn’t possibly repay it. In some states, payday loans and similar types of loans are severely restricted. In others, they’re outright prohibited. The Consumer Federation of America maintains an online interactive map you can use to view the legal status and restrictions of payday loans in your state.
Second, and more practically, guaranteed loan agencies want to reduce risk on their part to almost nothing. One easy way to do that is to keep your amounts low. By doing so, if you completely fail to pay back any of the money you borrow, they don’t lose much. Additionally, maintaining small limits helps ensure that a single loan won’t cover larger expenses. They’re hoping that you’ll take out multiple loans to afford your expenses.
On a final note, the small amounts they give out is how these lenders can fund requests so quickly. Fast and easy money doesn’t sound so easy now, does it?
Loan Terms are Very Short
The loan term refers to the amount of time you have to pay off your loan in full. In the case of lenders offering guaranteed approval, these are severely restricted. For payday lenders, terms may be limited to a maximum of 90 days in many states, but typically only go up to about 14 or 30 days. The reason is obvious – giving you less time to repay your debt makes it far more likely that you’ll default. If you do end up defaulting, most guaranteed approval lenders will happily extend your loan (also called a ‘rollover’) but only after charging a fine.
They Charge Extremely High Fees and APRs
Compared to the standard loan that you’d get through a bank, or even through an unsecured loan designed for bad credit, the cost of taking out a typical guaranteed approval loan is far higher. A study by the Consumer Financial Protection Bureau from 2017 found that the average APR on a payday loan was around 400%. To illustrate that with numbers, consider this scenario:
- You want to borrow $500
- The payday lender you work with charges $15 per $100 you borrow, equating to an APR of nearly 400%
- Your total interest charge is $75. Your total repayment would come to $575 dollars
While the above is a purely hypothetical scenario, those numbers come very close to illustrating the typical terms you find with a payday loan. $75 on top of $500 may not seem like a terribly high charge. However, when you consider that you might only have two weeks to come up with that money, it should be obvious why these types of loans are considered so high-risk.
The Contract Language Can Be Difficult to Understand
A final underhanded tactic that many guaranteed loan dealers employee is making your loan agreement difficult to understand. By doing so, they’re hoping that you’ll agree to their terms without fully grasping what they actually mean. While many states have laws in place stipulating that agreements be written in plain language that could be easily understood by most people, there’s very little that outlines what simple and easy to understand actually means.
A Final Note on The Risk to Your Credit
Earlier, I pointed out that just because a lender doesn’t check your credit to approve you for a loan, that doesn’t mean there’s no risk to your credit. There are two reasons for this.
First, if you fail to pay back your loan, most lenders will report your missed payment to the credit bureaus. Your payment history is the biggest factor in calculating your score. A late or missed payment report is all but certain to severely impact your score in a negative way.
Second, in most standard loan agreements, the lender reserves the right to check your credit in the future. If they think you’ve lied about your finances, or want to verify that you don’t have any record of financial litigation against you, they can check your report
Why Would Anyone Opt to Take Out a Guaranteed Loan if It’s so Risky?
Think about your own situation for a minute. You probably have bad credit, have some heavy debt you need to pay, and need to get money fast. That may have you feeling desperate to get cash. When we’re feeling desperate and scared, we don’t think rationally. We tend to gravitate to the easiest solution that will solve all of our problems. It’s a psychological element that predatory lenders love to exploit to their advantage.
Ludicrous as it may sound, plenty of people fall for the “guaranteed approval” loan trap every year. Pew Charitable Trusts found that 12 million Americans took out payday loans in 2010. Most often, the study found that people who were disabled, unemployed, or working with low-income were the most likely demographics to get payday loans. And, of course, nearly all of them had bad or fair credit scores.
Are There Any Safe Alternatives That Can Guarantee I’ll Get a Loan?
The unfortunate short answer is no. As I’ve previously pointed out, there isn’t a single lender in the market, shady or fair, that can absolutely guarantee you’ll get a loan. We at Loans Now pride ourselves on extending great offers for unsecured personal loans to people with bad credit that other agencies won’t work with. However, we certainly don’t guarantee that you’ll get a loan. We require a minimum credit score of 450 to use our service and we don’t lend money directly. It’s up to our providers whether or not they’ll approve you for any of their offers that we share with you.
How Do I Improve the Chances That I’ll Get Approved?
The above statement may be true but that doesn’t mean you won’t get a loan, even with bad credit. There are certainly some steps you can take to help improve your chances of not only getting approved for a loan but receiving much better terms.
Improve Your Credit Rating
First and foremost, if you want to increase the likelihood of receiving a loan, get your credit score as high as you possibly can. I won’t tell you this is quick or easy to do. Depending on why your credit is bad, this could take as little as a month or it could take several years. You need to not only check your score to know what it is but also thoroughly analyze your credit report. Once you identify what’s causing your bad credit, you’ll be in a better place to start fixing it.
Validate Your Ability to Pay
Your credit score may be the main thing that lenders gauge to determine your eligibility but it isn’t everything. Just as important is your ability to actually repay your loan. Contrary to popular belief, bad credit scores don’t automatically translate to low income. There are people who make six-figure salaries with bad credit, and some people with less than $40,000 a year have great credit. If you can show a lender that you can easily afford your loan payments, they may be willing to extend the amount you request in spite of your score.
Settle For a Lower Amount
The more you want to borrow, the higher the risk for both you and the lender. If you have bad credit, and can’t get approved otherwise, consider lowering the amount you want to borrow. You may want to use a loan to pay off the entire amount of debt, but receiving half is still far better than getting nothing at all.