Title Loans: A Brief Crash Course About this Common Practice

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You might know about certain loan types you can get. For instance, you can get a secured loan. When you do that, you’re using something valuable you have as collateral, like your house or some jewelry.

You can get an unsecured loan. When you do, you approach a lending entity and ask for the loan, and they’ll usually give you one if you have a steady job and at least decent credit.

In this article, though, we’re going to talk about another kind of loan, the title loan. This loan type uses your car as collateral. We will discuss whether you can get a title loan with bad credit, when you should consider this option, and some possible ramifications if you decide to get one.

How Title Loans Work

First, let’s describe the basics. If you want a title loan, you must have a car. This loan type falls into the secured loan category that we mentioned a moment ago.

You’ll approach a lending entity like a credit union or bank. You must show them proof that you own the car, so have its title handy. You should have that piece of paper in your files somewhere.

Title loans usually get you money for the short term, but they’re also typically high-interest loans if you compare the rate the lender will give you versus what you might get with other loan varieties. For instance, if you get an unsecured loan but have a good job and great credit, you should get a much lower interest rate than you’ll typically get for a title loan.

Liens

When you get a title loan, the lending entity puts a temporary lien on your vehicle. That means they have the right to potentially possess your property, the car, in this case, if you can’t pay back that loan.

You can also get a loan using something like your house as collateral. In that instance, the lending entity puts the lien on your house.

Any time a lender puts a lien on your property, whatever you put up, they can potentially take it from you if you can’t pay back the loan. Because of this stipulation in the contract, secured loans carry an inherent risk. If something unexpected happens, and you can’t repay that loan, you might lose the house, car, or whatever else you volunteered as collateral.

Can You Secure a Title Loan with Bad Credit?

Let’s say you have only fair credit. If you look at your FICO score, maybe you’re sitting at about a 600 or so. When you look at your Vantage Score, perhaps you’re at 610 or 620.

Most lending entities consider that decent credit. If you can get that score up over 700, you’re doing considerably better.

If you decide you need money, and borrowing it seems like a viable option, then using your car and getting a title loan becomes an attractive prospect if you have a middling credit score. You don’t need fantastic credit to get some money in the short term if you can show you own the car, and you’ll willingly get a lien on it.

What Drawbacks Come with This Loan?

Of course, if you put up something like a house, car, some valuable antiques, or anything else, and then you can’t pay back that loan, the bank or whoever else has the lien on that property or item can collect it. You can fight this process, but if they have a lien and you can’t pay back the money on time, the lender has the legal right, and they will enforce it.

If you won’t give up the item without a fight, they’ll give a collection agency your information. At that point, your life becomes pretty difficult.

Collection agencies will hound you every chance they get. They will call your house constantly, send you threatening emails, and they’ll start visiting your house before long as well. They’re like legal loan sharks. They’re not doing anything technically illegal or unethical, but you won’t like the experience much.

Paying off that loan or handing over your property will get them off your back.

What About Additional Drawbacks?

There’s one additional drawback that’s worth mentioning. If you get this loan variety, you will have a considerably higher interest rate running until you pay it back. If you have solid credit and a steady job, and you get a loan from a reputable entity, like a national bank, you might get an interest rate of around 5-8%.

If you get a title loan and have not-so-great credit, they might want double that in interest or more. You must pay back that loan as quickly as you can, or you’ll only owe more as time passes.

When Should You Get This Loan?

With these drawbacks, you might logically wonder when you should do this. There’s a specific time when it makes the most sense.

If you don’t have great credit, but you do own your car and have the title, you can pursue this loan type. Presumably, if you do, then you need some money urgently, and you can’t get it elsewhere. At this point, getting the title loan seems like a viable option.

However, only do so if you feel certain you can pay back the full loan in short order. For instance, if you know that you have a cash windfall coming, and you know when you’ll get it, then you might move forward with no issues. You’ll know the approximate date when you can pay off the loan, at which point the lien on your car vanishes.

If you’re not sure if you can pay back the title loan on time, then you’re getting into dangerous territory. The lender won’t break your thumbs or anything that dramatic, but they can potentially repossess your car. You probably don’t want that, so only get a title loan if you feel you can pay back the money expediently.