Whenever we think of loans, the terms “credit score” and “credit history” come to mind as qualifications for said loan. This includes car title loans, especially online versions. One question that frequently comes up is:
“Do title loans require good or excellent credit?” The short answer is no, with a few explanations.
These explanations include understanding both secured and unsecured loans, as well as hard and soft credit inquiries or credit checks. Once we understand these, determining what type of credit, or credit check, is required for a title loan is easier.
As you look into title loans you will probably read that they are secured loans, as we’ve mentioned before. This means that the vehicle used for the loan is collateral should the borrower default. Secured loans are those loans that are ‘secured’ by property put up as collateral for the loan.
The most simple explanation of a secured loan is pawning an item. Pawn shops have been around for a long time. Essentially you provide a piece of property in exchange for a loan. To get the property back you repay the loan, plus interest, in a period of time. Fail to repay and the pawn shop keeps and sells the item.
Collateral Lowers Risk
Because secured loans have collateral, this lowers the risk of loss to the lender. In the case of a car title loan, the fact that the lender takes a security interest in the vehicle helps guarantee them repayment should the borrower default.
This puts less of an emphasis on credit score and credit history than an unsecured loan. This does not mean, however, that title lenders do not check or factor in credit. Many lenders, including online title loan companies, do check credit and factor credit history into the loan decision.
Unsecured loans, on the other hand, rely heavily on credit history to make an evaluation. These loans do not have collateral associated with them. The guarantee to the lender that you will repay an unsecured loan is your promise to do so.
Because of this, a good credit is required for the vast majority of unsecured loans. Defaulting on an unsecured loan will have a very negative effect on your credit. Depending on the specifics of the unsecured loan the damage to your credit can take many years to repair.
Soft versus Hard Credit Inquiries
Another factor to take into consideration when looking at credit scores and history is the type of credit inquiry if required (if any). There are both hard inquiries and soft inquiries. These are very different, as described here.
Hard inquiries are formal requests for credit. These are recorded on your credit report and do affect your credit score. Whenever you apply for a new credit card, car loan, and most other forms of credit, a hard inquiry goes on your credit report.
A soft inquiry occurs when a financial institution pulls your credit history, but does not record a hard inquiry on your credit report. These types of inquiries are done to assess creditworthiness, but do not affect your credit score. Many title loan companies perform these soft inquires.
Online Title Loan Considerations
Currently online title loans are becoming more widely used as ways to borrow money, using vehicle equity, without needing to visit a lender in person. One consideration when looking into online title loans with no store visit is the likelihood of at least a soft credit inquiry.
This is done, at a minimum, to verify information. Without physically visiting the lender, and seeing the lender in person, they need to verify your identity, address, and any liens. This can be easily done with a credit inquiry. Just make sure to check if it is a hard or soft inquiry.
Bad Credit Title Loans
With the vehicle as security for the loan, getting a title loan with less than perfect credit is fairly common. Find a lender that does not check credit, or at least does not perform a hard inquiry. This way, your credit will not be affected when applying.
As always, preparation is a key step for the title loan. Prepare properly, find the best title loan company, and apply when ready. Less than perfect credit is usually not problem when getting a car title loan.