When you’re in a position where you need cash fast, title and cash loans can seem like a light at the end of the tunnel.
After all, receiving all the money you need in hand is difficult to turn down, and you’re sure that you can pay back the balance by your next paycheck. Even with this certainty, you may wonder, what effect do title loans have on your credit score? Like most financial-related questions, the answer isn’t written in black in white.
What is a Title Loan?
Before we talk about the effect that title loans have on your credit, let’s explore what a title loan is and how it works. Title loans involve using the title of your car as collateral for a loan. So if you fail to pay your loan within the set agreement, you will lose your vehicle.
Financial experts often consider title loans a poor financing choice because of their high annual percentage rates. Still, if you know you will have the cash to pay back the loan before it is due, it can be a viable solution in an urgent situation. Make your payments full and early if possible to avoid losing your vehicle.
Understanding Secured and Unsecured Loans
Title loans are treated differently than traditional bank loans because they are secured. A secured loan means that you have provided your lender with collateral. In the case that you cannot manage your loan, this provides the creditor protection against their investment. These agreements are shared with paycheck loans, pawn shop loans, car title loans, and other loan types requiring collateral.
Conversely, unsecured loans do not require any collateral. These types of loans are more traditional and provided by larger banking institutions. Instead, unsecured loan approvals are based solely on creditworthiness and trust. All unsecured loans require a credit check.
How Does a Title Loan Affect My Credit?
Title loans don’t have a significant effect on your credit. Some title loan lenders don’t even require a credit check before they grant you approval. This financing is often a solution for individuals with low credit who need money fast.
While making payments on time will generally help improve your credit, this isn’t the case with title loans. Conversely, occasionally missing a title loan payment will not automatically lower your score either- as long as your loan specialist does not repossess your vehicle.
The only time a lender may report your car title loan to the credit bureaus is under the circumstance of vehicle repossession. Losing your car is not only damaging to your life but can affect your credit negatively for years.
What are my options if I can’t meet my title loan requirements?
If you are in a hardship where you cannot pay your title loan, it may be tempting to walk away – they don’t count against your credit score. Besides losing your car, failing to meet your loan agreements can negatively impact your credit and your finances.
The consequences of walking away from your title loan will ultimately depend on your agreement with your lender. In many cases, if you voluntarily offer up your car for repossession, the lender will not report the failed agreement on your credit score. However, many lenders don’t want your vehicle. Auctioning off your car may be less profitable than forcing you to make the payments. If this is how your lender prefers to operate, you may find difficulty in getting out of your title loan.
Before you sign any contracts, you must understand your loan’s terms entirely. Your agreement should detail whether or not your lender has the right to refuse your collateral in exchange for payment. While this type of arrangement won’t necessarily affect your credit, failing to understand the terms of your agreement and communicate with your lender could hurt your finances.
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