Personal loans can be a useful tool when it comes to managing your finances, whether it’s covering a large expense or handling an emergency bill. However, if you’re looking for a loan that won’t impact your credit score, there are a few things you’ll need to consider.
Whether or not a personal loan affects your credit depends on if the lender reports to the credit bureaus. And loans that don’t report your activity to the credit bureaus can come with risks, such as high interest rates or less favorable terms. Before deciding to borrow this way, it’s important to understand how they work and what options are available.
9 types of loans that don’t report to credit bureaus
Here are a few common types of loans that may not report to the credit bureaus. Keep in mind that you’ll need to research the individual lender to determine if they report to the credit bureaus. Additionally, please note that in the event of a default on any of these types of loans, the original lender may transfer your debt to a collection agency or sell it to a third-party debt buyer, which could result in reporting to the credit bureaus.
1. Personal loans
Personal installment loans provide you with an upfront lump sum of cash (often directly deposited into your bank account). Loan repayments are typically made in smaller bi-weekly or monthly payments, also known as installments. Whether or not your personal loan activity is reported to the credit bureaus will depend on the lender. Some lenders may report to the credit bureaus and others may not. Do your research before you apply to be sure they are offering what you’re looking for.
2. Line of credit
A line of credit works similarly to a credit card but there are some big differences. Instead of charging purchases to a card, a line of credit lets you take a draw — up to a certain credit limit — and have the funds deposited into your checking account. As you repay, the funds become available to borrow again.
Similar to a personal loan, lenders that offer lines of credit may, or may not, report to the credit bureaus. Be sure to research your lender before applying.
3. Payday loans
Payday loans are high-interest short-term loans that typically have to be repaid in full on the borrower’s next payday. Most payday lenders do not report to the credit bureaus. However, because of their high interest rates and short term lengths, payday loans can be difficult to repay, which can lead to late fees. Rolling over payday loans can lead to a cycle of debt that may be difficult to get out of.
4. Title loans
Title loans are a type of personal loan that use your vehicle as collateral. Similarly to payday loans, they have high interest rates and a short-term length (typically around 30 days). Title lenders often don’t report to the credit bureaus, but if you fail to repay the loan they can seize and sell your vehicle to recoup their losses.
5. Cash advance apps
There are apps available that can offer a small cash advance on your paycheck. The money is usually withdrawn automatically to repay the loan on your next payday. These apps may charge service fees, and borrowing costs can sometimes be unclear to the borrower. This industry may not be as closely regulated as traditional payday loans. These types of lenders don’t typically report to the credit bureaus.
6. Pawn shop loans
With a pawn shop loan, you’ll take a valuable item to a brick-and-mortar shop and they will lend you a portion of the item’s value. These are normally cash loans and don’t report to the credit bureaus. However, if you fail to return and repay the loan, the shop will sell your item to recoup their losses.
7. Buy now, pay later
Buy Now, Pay Later (BNPL) services allow you to split a large purchase into smaller payments over time. When these services first became available, most didn’t report to the credit bureaus. But that trend has been changing and some BNPL services are now reporting activity and defaults.
8. Tax refund loans
Tax refund loans are offered by tax preparation companies. Generally, they offer an advance on your expected tax return. These loans often don’t require a credit check and don’t typically report to the credit bureaus.
9. Loans from family or friends
Borrowing from friends and family can be a good idea if you need quick cash. Your support system will often offer you much better terms than a lender and they don’t have to involve any paperwork or credit checks. However, borrowing from family or friends can put strain on a relationship, so be sure to clearly outline the repayment terms beforehand.
How does credit reporting work?
Credit reporting is the process where lenders send information about your credit history to the three major credit bureaus, Experian, Equifax and TransUnion. If your lender reports to the bureaus, this information can include:
Credit applications. When you apply for new credit, lenders may run a credit check while determining approval. A soft credit check won’t impact your score, however a hard credit check can temporarily lower your credit score.
Payment history. Your payment history accounts for a large portion of your FICO® Score. If you make consistent on-time payments, it can help you build your score. On the other hand, missed or late payments can damage your score.
Credit utilization. If you have a credit card or line of credit, your lender may report your credit utilization ratio to the credit bureaus. This is the ratio of how much credit you have used versus how much you have available. A high credit utilization score can be a factor in your overall credit score.
Can no credit check loans affect your credit score?
Though no credit check loans and loans that don’t report to the credit bureaus don’t typically have an impact on your credit score, there are still some situations where your credit and financial health can be impacted.
Missed payments. Your debt may be sent to collections if you consistently miss payments. Collection agencies almost always report to the credit bureaus and it can have a negative impact on your score.
Limited credit-building opportunities. If you take out loans that don’t report to the credit bureaus, your good borrowing habits — like keeping a low credit utilization ratio or making on-time payments — won’t count towards helping you build good credit.
What are the pros and cons of credit reporting?
Pros
Build credit history. On-time payments and other good borrowing habits can help you improve your credit score and overall creditworthiness.
Better terms. Traditional financial institutions like banks and credit unions often have strict eligibility requirements. A good credit score can help you meet these requirements and get access to new loans with better terms and larger loan amounts.
Financial stability. A good credit score can open up a lot of financial doors. Not only does it make it easier to borrow money, but it can also help you when it comes to things like applying for a place to rent or securing good insurance rates.
Cons
Hard credit checks. Some lenders do a hard credit check when you apply for a loan. This can appear on your credit report and temporarily lower your credit score.
Impact of missed payments. Late or missed payments that are reported to the credit bureaus can stay on your credit report for seven years. Because your payment history is such a large factor in calculating your credit score, missing payments can have negative long-term effects.
High credit utilization. If you have a credit card or line of credit, and you’re using a lot of your credit, it can negatively affect your score if your lender reports to the credit bureaus.
Final Thoughts
Before applying for a loan, be sure to carefully consider all of your options and determine whether or not your lender reports to the credit bureau. Some types of loans are better than others. Be sure to research lenders to make sure they’re reputable and that their loans are the right fit for you. You should also carefully consider your financial situation because in some cases, reporting the credit bureaus can help you build your credit.
DISCLAIMER: This content is for informational purposes only and should not be considered financial, investment, tax or legal advice.
