How Title Loan Credit Reporting Works
Nearly everyone gets into a cash flow pinch at one point or another, creating the need for simple, quick access to money. If you’re like most, tapping into an emergency savings account or drawing from a low-interest credit card isn’t an option when an unexpected bill or other financial emergency comes up. Fortunately, there are options for fast cash when you have a valuable asset, like your vehicle. A car title loan can be your saving grace in a time of financial need.
Car title loans are incredibly helpful for those who have had some credit missteps in the past, such as a bankruptcy, a missed payment or two, or an account in collections. Because you pledge your vehicle title as collateral for the car title loan, your lender does not need to check your credit history or score to get you an approval for the loan. However, understanding how title loan credit reporting works when there is no initial credit check can be a bit confusing. Here’s the breakdown along with the benefits and drawbacks of title loan credit reporting.
Title Loan Credit Reporting
When you apply for a new car title loan, the lender does not typically perform a hard check of your credit. That’s because you are offering your car title as collateral to back up the loan. Due to this added protection against financial loss for the lender should you fail to repay, your credit history, no matter how bad, doesn’t affect your ability to get a car title loan.
Car title loans can be a smart way to access simple financing without your credit history plaguing the process, and not having a hard inquiry from a lender helps keep your credit history clear of potential red flags down the road.
Because qualifying for a car title loan is designed on the principle of collateral instead of an individual’s credit history, most car title lenders do not feel it necessary to report a new title loan to the major credit bureaus. That’s helpful to you as the borrower because other lenders with which you may apply for credit cannot see your title loan history or payments due each month. There are, however, a few downsides you should consider when it comes to title loan credit reporting.
Credit Reporting Considerations
If you get into financial trouble and cannot make payments on your car title loan, the amount owed to your lender may end up in the hands of a collections agency. While the initial process of applying for and repaying a title loan does not affect your credit directly, having an account in default certainly will. Other lenders, employers, and even insurance companies can view your credit history which includes negative information like an account in default. If you have a history of missing payments, you may find it difficult to get new credit accounts in the future. In most cases, bad repayment history stays on your credit report for several years.
Another title loan credit reporting consideration is your ability to repair credit history over time. Because title loans are not reported to the credit reporting agencies, they do not count toward your payment history or length of credit history – two factors that contribute heavily to your credit score. Other credit accounts, like a secured credit card or a small personal loan, are a surefire way to repair your credit history and score when that is your overarching goal; car title loans are best used to pad your cash flow on a short-term basis.
Title loan credit reporting works in your favor if you are battling poor credit and cannot otherwise qualify for traditional lending options. However, failing to repay your title loan often leads to a collections mess that can be difficult to clean up quickly. To save yourself the headache of negative car title loan credit reporting due to a missed payment, make sure to plan ahead.
Create a buffer in your checking or savings account to ensure you always have the funds on hand to make your payments and set reminders for the due date so you aren’t ever late. It’s also important to work with a lender that helps you understand what you can afford from the start. Car title loans and credit reporting can help you through a period of tight cash flow, but only when you are prepared to make good on your promise to repay over time.