Title lending is notorious for outrageous interest and lax regulation. What it is hardly accused of, however, is having adverse credit impact on the borrower. As long as the vehicle used as loan security is not repossessed, any interaction with title lenders do not move credit scores whatsoever.
Generally, title loans in Boise, Provo, and other American cities where they are allowed have never had any effect on the credit health of borrowers. But that is no longer the case.
To update your view of title lending in America, debunk these misconceptions that you probably still believe today:
A Title Loan Is a Debt Trap
This argument is the favorite of title lending detractors, and they might have a point. Unlike other secured financial products, title loans tend to be more expensive because they are usually used by the least attractive borrowers out there.
Although an irresponsible borrower can be in financial distress when repayment becomes unavoidable, the story does not necessarily end in a vicious debt cycle. If you choose a reputable title lender, expect the other party to respect the Fair Debt Collection Practices Act. If you default, your vehicle will be repossessed in accordance with the rules, but you will not be forced to keep your debt as it increases until it is paid off.
The thing is that you need to work with a trustworthy title lender to keep your balance from ballooning against your will. Spend more time doing your research to separate the good lenders from the bad.
A Title Loan Lender Runs a Credit Check
No, a title lender is not interested in your credit reports. The other party can perform a quick background check to combat fraud, but no hard inquiry is conducted.
The size of your loan is based on your vehicle’s current value, and the interest you qualify for is usually dictated by the competition. Your credit score, while it is essential to traditional lenders, does not decide for title lenders. Although a credit check can knock just a few points off your score, expect yours to remain the same immediately after your loan is signed off.
A Title Loan Payment History Does Not Get Reported
Usually, title lenders do not report to credit bureaus. Thanks to advanced technology, though, payment histories attached to car title lending have become accessible to fintech startups. These companies use such information to reinvent the credit scoring system.
If your prospective title lender shares financial data to other parties, timely repayment can boost your credit score. Of course, you might suffer if your loan turns delinquent.
A Title Loan Is Not Factored in Overall Credit Utilization
As sets of alternative financial information of consumers become less fragmented, taking out a title loan can decrease your credit score as it raises your level of indebtedness. But then again, new factors can be introduced used to calculate your creditworthiness, so you can use other others to make up for any point you might lose.
Applying for a title loan is slowly losing its image as a one-dimensional activity. It can now bail you out during emergencies and help build your credit at the same time.