For some people, title loans are often looked at as the last resort when they need to borrow a larger amount of money as soon as possible and have no other options to turn to for help. And although this type of loan has been the most widely criticized and misunderstood, despite popular belief, according to the Consumer Finance Protection Bureau (CFPB) only about 20 percent of borrowers who get title loans end up defaulting on their loan – which means the other 80 percent has success repaying their debt.
For many years title loans have been a convenient way for those with less than perfect credit to access a larger loan amount when they need it. However, if you want to know more about title loans and if this type of loan can affect your credit, keep reading as we’re breaking down how title loans work and the role credit plays in the whole title loan process.
What is a title loan?
A title loan is a short term loan where a borrower uses the title of their motor vehicle (such as a car, motorcycle, boat, etc.) as collateral to secure the loan.
The terms of the loan varies by state and loan type. Some states refer to this secure type of loan as a title pawn loan, where the payment is usually due in full within one month. Other states may refer to this type of loan as a title installment loan, whereas the loan can be paid back in increments over a set period of time. In Alabama for example, these loans fall under the Consumer Credit Act or Mini-Code.
What role does credit play in the title loan process?
Since title loans are based primarily upon the title, the value of the vehicle, and also the customer’s ability to repay the loan, credit may not even be used in the approval process. The credit report will however be used to comply with the Military Leave Act (MLA) and the Office of Foreign Assets Control (OFAC). Most lenders will use a Credit Reporting Agency (CRA) like Microbilt, Clarity, Lexis Nexis or Factor Trust or one of the three major credit bureaus: Experian, Trans Union or Equifax.
For title installment loans, most lenders will also use the report to evaluate basic credit worthiness and/or ability to repay. The value, age, and mileage of the car will still be used and can have a greater impact on how much can be borrowed or if a loan will be approved.
Can applying for a title loan affect my credit?
Regardless of how the data is used, when a lender accesses a credit report, it will still cause an inquiry on a consumer’s credit profile with each CRA that was used. That inquiry can affect your credit positively and/or negatively.
Positive impact: Inquiring for credit is positive in the fact that a customer is active and is building a credit profile, and periodic inquiries when they result in obtaining loans can create positive attributes and increase various credit scores.
Negative impact: Alternatively, multiple, frequent, and recent inquiries can have a negative impact on attributes and credit scores.
Can repaying a title loan (or missing a payment) affect my credit?
Repaying your loan may also have an effect on your credit. In the instance where a lender uses information from a CRA or a credit bureau during the application process, that lender will also be required to report back to that CRA or credit bureau the type of loan, its term, and the history and payments you make on it. This information will then be shared with other lenders that utilize the CRA or credit bureau’s services. If they use a scoring model like the Vantage or FICO scores, or their own custom model, the type of loan and payment amount and history may affect the score.
Defaulting on your title loan and being more than 90 days past due on a title installment loan may reflect negatively on your credit and can impact your ability to borrow in the future.
Alternatively, if you make you payment or payments on time, and your lender reports your loan performance to a credit bureau or credit reporting agency, the title loan may help your credit. Particularly for other title lenders, when they use a credit report and see a history of paying title loans, the credit scores from the CRA will tend to be higher, and other factors they use will be positively affected. Even when reviewing a report with a manual decision process, seeing one or more title loans paid satisfactorily will aid in the decision process.
As you can see, credit plays a role in the title loan process from the inquiry stage to repaying back the loan. While it is not always the determining factor when getting approved, you may find that it can help or hurt your credit depending on the lender you choose and the CRA or credit bureau they report back to regarding your loan. If you have more questions about how title loans work or what happens if you default on your title loan, you may get your questions answered here. If you want to have an idea of how much you could borrow with a title loan, use this loan calculator here.
For over 20 years, Always Money Finance has been a regional leader in providing affordable short-term credit solutions to customers across the southeast looking for a convenient and confidential way to meet their needs. If you’re in a jam and need immediate help, any of Always Money’s small personal loans may be just what you need to get you going in the right direction. If you have questions about auto title loans visit www.alwaysmoney.com or call 855-GO-ALWAYS (462-5929) for the help you need today.
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