Title loans are a popular financial product because they do not show up on a credit report or affect your credit score.
Title loans are a form of secured debt since the loan is using your vehicle as collateral. Because of this, lenders generally do not report the transaction to credit agencies, that is, so long as you pay back your loan on time.
This doesn't mean that there is no risk involved in title loans. If you fail to repay the loan on time, the lender has the right to repossess your vehicle and sell it to recover their money.
A repossession could wreck your financial situation, your life, and of course your credit. Though if it gets to that point, you will probably be more upset about losing your car 🚙 than your credit score taking a hit. So let's work hard to not allow that to happen!
But we need to outline the realities of if it happens.
There are several things that could happen if your vehicle is repossessed and sold:
- The lender could report the repo to the credit agencies, which, obviously, will be added to your report.
- Once the repossession is reported, it could negatively impact your credit score.
- How much? A repossession can lower your score by as much as 100 points.
- The repo could stay on your report for up to seven years!
A repo event can make it harder for you to get approved for other loans, credit cards, or mortgages in the future. It can also increase your interest rates and insurance premiums.
Adding further insult to injury, if the sale of your vehicle does not cover the full amount of your loan, you may still owe the difference to the lender. This is called a deficiency balance. The lender can sue you for this amount and obtain a court judgment against you. This judgment can also appear on your credit report and damage your score.
Title loans can be a quick and easy way to get cash, and they will not affect your credit score (if you pay back the loan in full and on time), but it is important to note that title loans usually come with high interest rates and fees.
With that feather in your cap, make sure to budget before you take out a title loan and only borrow what you can afford! 🙌