Title loans are high-interest, short-term loans that you can get by using your car title as collateral. Because they are secured loans, the lender generally doesn’t care what your credit score is. And many title loan companies do not bother to report the loan to credit bureaus, so having a title loan, even if you default or fail to make payments, is unlikely to directly affect your credit score. But the loans can hurt your finances and indirectly affect your credit score.
How does a title loan work?
When you get a title loan, you basically sign over the title to your car in return for a cash loan from a lender. If you pay the loan back on time, you get your car title back. However, if you can’t pay it back, then the lender will take possession of your car. You generally have to own your car free and clear to be able to take out a title loan, because the lender does not want to deal with any liens that could prevent it from getting its money.
Advantages of title loans
Title loans can be a good way to get a loan for people with a low credit score. Because of the collateral involved, the lender doesn’t care about your credit score. The loans also are easy to get and the application process is quick.
Disadvantages of title loans
Title loans are notorious for their high interest rates, which often can be in the triple digits. Title loans also often come with very high fees, so in essence, you are paying a lot of extra money to get your loan. They are very short term, also usually only giving you a month or two to pay back the money.
How a title loan could affect your credit score
Though title loans aren’t likely to directly affect your credit score, they could have an indirect effect. For example, if in the course of trying to pay off your title loan you are late on other payments, such as your credit cards, that could cause your credit score to drop. In fact, studies show that people are loathe to lose their cars, which means they are likely to pay off their title loans at the expense of other areas of their finances.
Before getting a title loan, you should consider the effect it will have on your finances and the potential indirect effects it could have on your credit score.