If you are in desperate need of money quickly, and you have a poor credit history, you probably do not have that many options available to you. You tend to have payday loans and car title loans. Both expensive ways to borrow, but neither one will care all that much about your credit history.
Here, we want to take a look at the idea of car title loans. Specifically, we want to take a little look at how taking out a car title loan will impact your credit score. We are also going to wrap up with a few ideas on this type of loan (i.e. whether you should be opting for this loan or not!)
What is a car title loan?
A car title loan is a type of secured loan.
When you take out a car title loan, you are essentially borrowing against your vehicle. You are telling the lender “if I fail to pay my loan back, you are legally entitled to my vehicle”. So, if you miss repayments and are unable to agree with the lender, they will seize your vehicle and sell it at auction.
Car title loans are designed for those who have a poor credit history. They are for those who have no other feasible way to borrow cash. They are for the people who are at most risk of being unable to pay their loans back on time. Of course, this means that this type of loan can also be incredibly expensive. We are talking interest rates of up to 300% APR.
Normally, car title loans will last for 30-days, but there are some installment car title loans for those who are borrowing larger sums of cash over a longer time.
Remember: you are only able to take out a car title loan against a vehicle you own. So, if you have a car via a hire-purchase agreement, then you will not legally own the car title, and thus you cannot put it up as collateral for a loan.
What is your credit score and why does it matter?
Since you have landed on this page, we are positive that you already have a rough idea about what a credit score. If you don’t, then this section is for you.
Essentially, your credit score is a numerical representation of how likely you are to pay back any money that you borrow. A high credit score indicates that you are a good proposition to lend to. It shows that you have a history of paying back loans on time—read more here.
It shows you have a good credit utilization ratio. If you have a poor credit score, then this indicates that lending to you is inherently risky, and lenders should generally avoid handing you money because there is a major risk that they will get their money back. If they do lend to you, then they may charge a slightly higher than normal interest rate to help offset some of this risk.
Many factors go into calculations for your credit score. Different credit agencies will use different methods for working out your credit score. On this page, we are concerned with three of these factors. These are the ones that will often come into play when you are borrowing money.
Normally, when you apply for a loan, the lender will carry out a credit check on you. They will be looking at your credit score to see whether they should be lending to you. Each credit check that is carried out will harm your credit score. It may knock it back by 5-10 points. This is because those who are planning to borrow money may not necessarily be in a good financial situation, and this makes them riskier to lend to.
When you may the repayments on a traditional loan, the credit agency will be told. This will have a positive impact on your credit score and, ultimately, this will cause your credit score to rise.
If you miss the repayments on a normal loan, then the credit agencies will be told. This will cause your credit score to fall.
Of course, these factors will apply only in ‘normal’ situations. Shall we take a little look at whether they will come into play when you take out a car title loan?
What impact does applying for a car title loan have on your credit score?
In most cases, applying for a car title loan will not have any impact on your credit score. This is because lenders will not actually carry out a credit check on you. There may be a few that carry out a credit check but, generally, with this type of loan, there is no sense in them doing that.
Obviously, this means that you can start the application process for a car title loan without seeing a ‘ding’ on your credit score. This means that the application is a great way to test how much you can borrow without seeing an impact on your credit score that will stay with you for years and years.
There are a few different reasons as to why a car title loan company will not carry out a credit check. The first is the fact that they know that anybody applying for a car title loan is unlikely to have a decent credit score, to begin with. For many, applying for this type of loan is an absolute ‘last resort’. They are not going to apply if there are better lending opportunities available to them.
The most important reason is that this is a secured loan. If you do not pay back your loan, then they will seize your vehicle. This means that they are going to get paid back no matter what happens with your loan. They do not need to check your credit history to see whether you have a history of failing to pay back your loans or not, because no matter what happens, with a car title loan they are 100% guaranteed to get their money back.
What impact does paying back your car title loan have on your credit score?
You may think that the lender not carrying a credit check out on you is a good thing. However, it isn’t. If they are not carrying out a credit check when you apply for a title loan, it means that they will also not be reporting to the credit agencies when you do pay off your loan.
A lot of people seem to hold the belief that taking out a title loan is a brilliant way to boost their credit score. However, if you pay back the loan, there is absolutely no impact on your credit score. It will never be recorded that you borrowed money. It will never be recorded that you paid the loan back. The only people who will know about your agreement will be you and the lender.
Sure. There may be a few title loan lenders who may report that you have paid back your loan. However, these are exceedingly rare. Rare to the point where it is unlikely that you will ever encounter one.
The ultimate result is that if you borrow money with a title loan, there is absolutely no benefit to you beyond being able to obtain money in the short term. In the long term, you will have had to pay back a pretty large loan with a hefty interest rate, and your credit score is not going to change at all.
In theory, you can continually apply for car title loans as you pay off your loans without seeing a hit to your credit score. However, as you will see later on, this is not something that is recommended at all.
What impact does failing to pay a car title loan back have on your credit score?
This is where things become a little bit complicated. This is because a lot of it is going to be dependent on your situation, plus the lender that you are working with. Generally speaking, we would never advocate failing to pay a car title loan back.
We know that lenders will often tell you that they will seize your vehicle if you fail to pay your loan back. Some will. However, most will not seize your vehicle the first time you miss a payment deadline. This is because it isn’t profitable to go down that route. Instead, they want to rope you into extending the loan. This means that they will be able to put more money into their pocket from the increased amount of interest that they gain from you. This is partly why it is never recommended to opt for a car title loan unless you have no other choice. It is easy to get trapped in a cycle of debt once you miss the first payment.
If you continue to miss payments, then they may seize your vehicle. Again, this is something that is going to be an absolute last resort for them. They do not want to go through the hassle of selling your vehicle at an auction. Not when continuing to lend to you is going to be better for their bottom line.
If they seize your vehicle, or you hand your vehicle off to them, the debt is considered ‘paid’, and thus it is highly unlikely that they will report to any credit agencies that you never paid back your loan. Because, technically, you did.
However, in rare cases, they may report to these agencies. You cannot predict when they are going to do this. It is not something that you will ask about when you take out your loan either. You probably do not want to indicate that there is even the most remote chance that you are not going to be able to pay your loan back!
If they cannot seize your vehicle for whatever reason, and you have failed to make payments on your loan then, yes, they will report you to credit agencies for non-payment. They will also likely sell your debt on to an external debt collection company which, of course, means that there will be further negative marks on your credit score.
If you take out a car title loan, then it is vital that you pay back what you owe, or voluntarily hand in your vehicle if you are unable to pay what you owe. If you do not, then there is a strong chance that you will get a negative mark on your credit report. As you may well know, this is a negative mark that is going to be sticking around on your credit report for a long, long time to come.
How do you prevent there being a negative impact on your credit score when taking out a car title loan?
Before you apply for your title loan, you can check the terms and conditions of the loan application process. It will tell you whether they will be carrying out a credit check or not. This is not something that they are allowed to hide due to the negative impact it would have on you. If you are applying for a loan in person, then just ask the person serving you. As we said before, the chances of there being a negative mark on your credit report due to the application process are virtually nil.
Other than this, the only other way to prevent a negative impact on your credit report is to just pay your loan back on time. If you feel as if you cannot pay your loan back on time, then you need to talk to the lender to see if you can come up with a solution. For them, a lot of it is going to be focused on trying to extend your loan terms. This will mean extra interest. Take it if you can afford it, but do not get trapped.
If you are still unable to pay your loan back, and you do not want that negative hit on your credit score (and the debt collectors knocking), then you will need to hand in your car to the title loan company. Remember; if you fail to pay your loan back on time, they legally own that vehicle. You told them that they would have title to the vehicle in this case. If you do not hand it in when you have not paid your debt, it is essentially theft of a vehicle. This means that the issues you face will be a lot worse than just the negative marks on your credit history.
It is important to note that some car title lenders will not accept your car in the event you fail to pay back your loan on time. Some just want to get you into that never-ending cycle of debt. In some states, this is highly illegal. In others, this sort of practice is allowed to fly.
Before you sign any sort of agreement with a company, you must go through the terms and conditions of the loan. This should tell you exactly what will happen if you fail to pay your loan back. It will even tell you whether there is going to be any sort of negative impact on your credit score, so every bit of information found in those terms and conditions is going to be vital!
Should you get a car title loan?
Car title loans are designed for those who are unable to obtain a loan in any other way. This means people with a poor credit score. If you have a decent credit score and would have no issues applying for a typical loan, or even the ability to use a credit card, then under no circumstances should you be considering a car title loan. It is an expensive way of borrowing and, of course, you have the risk of losing your vehicle.
If you have a poor credit score, then you may still need to think long and hard about whether a car title loan is for you. Sure. There is not going to be an impact on your credit score, but this isn’t the only thing that you need to think about. You need to think about the cost of the loan, and whether you can afford the repayments on the loan.
If you can’t, then you will end up with a more expensive loan or, worst-case scenario, you lose your vehicle. Losing your vehicle may make it difficult to get into work, and this may impact your financial situation even further.
Despite what you may have been told in the past, you should not apply for a car title loan if you are looking to boost your credit score. If you meet your loan obligations, then the credit agencies will never find out. As we said, this means that car title loans are not ‘credit building’ loans. They are just expensive loans that put your car on the line.
Yes. Car title loans do have their place. There are people out there who will be benefiting from this type of loan. Those people may have no other options available to them. However, this is always going to be a type of lending that you should only ever consider when you have exhausted every other option available to you. Even a payday loan would be better than this type of loan because at least then there is no chance you will end up losing your vehicle due to missed repayments although, of course, that type of loan is still going to be quite expensive!
Taking out a car title loan is not going to have an impact on your credit score. Paying back your loan on time is not going to have an impact on your credit score. Missing repayments may have an impact on your credit score. So, if you do not want to knock your credit score down any further, this may be the right type of loan for you. Although, do bear in mind that it is expensive and is unlikely to have a positive impact on your credit history too.