If you have an urgent expense, a title loan may be on your radar, especially if you haven’t qualified for other loans. With a title loan, you use your car as collateral for a loan. Whether a title loan can hurt your credit will depend on how you maintain the loan. Below, we’ll discuss what a title loan is and how it may affect your credit.

How do title loans work?

A title loan is a short-term loan you can take out using your car as collateral. Collateral is something valuable you own, like your car or home. Most lenders may require you to own the vehicle, but some will approve a loan if you’re still paying for your car. You can typically borrow between 25% and 50% of your car’s value if it passes an appraisal and inspection.

Title loans typically come with interest rates that can exceed 300% and short repayment periods.2 Also, if you can’t repay a title loan within 15 to 30 days,3 you may need to roll over the loan and pay additional interest and fees. If you fall too far behind, the lender can repossess your vehicle.

Do title loans affect your credit?

The short answer is that it depends. When you apply for a title loan, the lender will not complete a hard credit check, which typically drops your credit score by a few points. On the other hand, if you’re at least 30 days past your due date, the lender may report it to the three major credit bureaus (Experian, Transunion, and Equifax)4 in addition to taking your vehicle.

Alternatives to title loans

While title loans may seem like a convenient way to access fast cash, they’re extremely expensive. If you don’t repay them on time, a title loan can trap you in a cycle of debt. So, it should be a last resort after you’ve exhausted alternative options, such as:

• Speak to your creditors: If you know you won’t be able to pay a bill on time, let your creditors know. They might give you additional time to make your payment or shave off a few dollars.
• Talk to friends and family: If you’re in a bind, putting pride aside and having an honest conversation with your close friends and family may be helpful. They may be able to offer you some solutions.
• Get a personal loan: You may still get approved for a personal loan with less-than-perfect credit. Shop around and explore your options. Fortunately, many lenders allow you to prequalify for a loan to check potential offers without any impact on your credit score.

Avoid title loans whenever possible

Even though title loans may not damage your credit score immediately, there is still a slight chance that falling behind on payments could negatively affect your credit. In addition to that, extremely high interest rates can quickly take a toll on your budget and finances. Instead of a title loan, find alternative ways to cover your expenses and tackle your debt to give you more peace of mind.

Sources:

 https://consumer.ftc.gov/articles/what-know-about-payday-and-car-title-loans#car

https://www.experian.com/blogs/ask-experian/when-do-late-payments-get-reported/

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