To begin, what is a title loan? This loan allows you put your asset such as a car as collateral when you are taking a loan. The question here is, does taking a loan in such a way affect your credit ratings? Well, we will eventually answer this and give you a good reason why, but first, it is essential to understand that getting a title loan isn’t tricky at all. People talk about it a lot and fear the consequences that might occur due to the inability to pay the loan in time. It is perfectly safe to get a title loan if it is credit rating you are concerned about.
Additionally, to answer the question, title loans do not necessarily affect your credit ratings. When you take a title loan, it is your car that is on the line. This way, your credit ratings remain out of the equation. Even while acquiring a title loan, little or no attention is paid to your credit ratings since these are not involved. It is really smart to get a title loan rather than a standard loan since the credit ratings aren’t affected. The debt is not counted on your credit card or your credit ratings. Everyone knows the importance credit ratings play in one’s financial life. You need to have an excellent rating to get any loan.
In case you are unable to pay your loan on time and things go bad, your credit rating will not be harmed but your car will face the music. You will have to give up your car and the deal will come to an end. There are however, some few cases where a very slight change is seen on the credit ratings as a result of the title loan you’ve taken.
How Do Title Loans Work?
Before we get into how exactly title loans affect your credit, you need to understand how title loans work in the first place. You put the title of your car up as collateral, essentially, so if you fail to repay back the loan then you will lose the car.
Some consider them a bad idea due to their high APRs, but if you know for sure that you’ll have the cash to pay back the loan before it’s due, then they can be a viable solution. To avoid losing your car, it’s the utmost importance that you make your payments, preferably paying the entire sum as soon as you have the money.
How Do Title Loans Affect Your Credit?
Ultimately, a car title loan will have very little effect on your credit. Most title lenders won’t even check your credit score before approving you. Title loans are often an avenue for people with low credit to get money in emergencies.
Usually, a title loan will not affect your credit either way. Making payments on time is typically a way to increase your credit score, but this is not so with title loans. On the other hand, missing the occasional payment will not lower your score either, so long as your vehicle is not repossessed.
Car title loans will be reported to credit bureaus in the case of vehicle repossession, and that has the potential to knock you down a few notches. Not only is losing your car a disaster for your daily life, but it will also harm your credit for years.
Secured vs Unsecured Loans
The reason that car title loans are treated differently than many other loans is because they are a secured loan. This means that the lender has collateral. They have something that assures that they aren’t going to be left standing empty handed. This is the case with car title loans, pawn shop loans, or any other type of loan that requires you hand over a form of collateral.
Unsecured loans, however, do not require any collateral. Instead, they are based on your credit worthiness, so they will require a credit check. Unsecured loans are usually through a bank or a dealership, institutions that can withstand to rely on credit scores. These type of loans are likely unavailable to people with low or no credit.
Can You Just Walk Away?
If car title loans don’t count against your credit score, what’s to prevent you from just walking away? Well, you would lose the car, but assuming you were alright with that, are there any other negative consequences?
Ultimately, it will depend on your lender. If you voluntarily offer up your car for repossession, it won’t show up on your credit score. However, many lenders actually don’t want to settle for your car. Selling your car at auction is less profitable for them than to just keep you stuck making payments. If you’re unlucky enough to end up with this sort of lender, you cannot get out of title loan debt. Instead, you’ll be stuck until you can pay back the loan. Look over your contract before you sign it! It should detail whether or not the lender has the right to refuse your collateral. Title loans can be a big help in a financial emergency, but you don’t want this to turn into a big mistake. While it likely won’t affect your credit, it will affect other aspects of your finances, so go into this with a clear head.