Do Title Loans Affect Your Credit Score?

Dayton Uttinger  | 

If you’re desperate for fast cash, then a title loan may seem like an appealing solution. After all, walking out the same day with cash in hand is hard to turn down. But even if you’re sure you’ll be able to pay the loan back by your next paycheck, there is one question in the back of your mind; does having a title loan affect my credit score? The answer is most likely no, but like most things finance related, the answer isn’t completely black and white.

How Do Title Loans Work?

Before we get into how exactly title loans affect your credit, you need to understand how title loans work. To receive a title loan, you put the title, or ownership, of your car up as collateral. If you fail to repay the loan by the due date, then you will lose your car.

Some consider title loans a bad idea due to their high APRs, but like credit cards, if used responsibly, they can be a viable solution. To avoid losing your car, it’s of the utmost importance that you make your payments on time, preferably paying the entire sum as soon as you have the money.

How Do Title Loans Affect Your Credit?

In most cases, a car title loan will have very little effect on your credit. However, car title loans are reported to credit bureaus in the case of vehicle repossession. This means that losing your car can not only be disastrous for your daily life, but can harm your credit score for years. Title loans are often an avenue for people with low credit to get money for emergencies.

It’s also important to note that, unlike other debt payments, making your title loan payments on time or in full won’t improve your credit score. This is because a title loan is a different type of loan than your standard loan. 

Secured vs. Unsecured Loans

The reason that car title loans interact with your credit score differently than many other loans is because they are a secured loan. This means that the lender has something — collateral — that assures them that no matter what, the loan will be paid. This is the case with car title loans, pawn shop loans, or any other type of loan that requires you to hand over a form of collateral.

Unsecured loans, however, do not require any collateral. Instead, they are based on your creditworthiness, so they will require a credit check. Unsecured loans are usually through a bank or a dealership, institutions that can stand to rely on credit scores. These types of loans are typically unavailable to people with low or no credit, unless they have a cosigner.

What Happens If You Don’t Pay Your Title Loan?

Ultimately, the consequences for not paying down your title loan will depend on your lender. Some lenders offer roll-overs, where your loan gets rolled into a new loan, which can increase your payments. Or, in some cases you can voluntarily offer your car up for repossession instead of repaying your loan.

However, many title lenders don’t actually want your car. Selling your car at an auction is usually less profitable for them than collecting your loan payments. If you have this type of lender, they may refuse your collateral, and you’ll be stuck with your title loan debt until you can pay it in full.

The most important thing you can do is read your contract before you sign it. It should detail whether the lender has the right to refuse your collateral, and the consequences of not repaying your loan. Title loans can be a big help in a financial emergency, but can quickly turn into a big mistake if you don’t have a clear understanding of what you’re signing up for.

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Dayton is a chronic Wikipedia addict, which is detrimental to her social life but stellar for her writing. She resides in Boise, ID, surrounded by her own frantic outlines, highlighted encyclopedias, and potatoes. The latter was not by choice.