Does a Title Car Loan Affect Your Credit Score?

Any effort to improve your credit score will prove beneficial over time. Being diligent about paying your bills, managing your existing credit carefully and applying for new credit infrequently will keep your score high. On the other hand, getting into trouble with your credit can have the exact opposite effect and leave you looking for ways to improve. 

A car title loan is one of the easiest forms of credit to seek approval. This is because they are secured loans, which means lenders tend to be a bit more lenient, but does a title car loan affect your credit score?

Let’s look.

What is a Car Title Loan?

As the name implies, this is a loan against which you pledge the title to your car in exchange for the cash. Signing on for one of these short-term loans gives the lender an interest in the title to your car. Should you default on the loan, you grant the lender the right to take your car and sell it to recover their money.

The exact amount you can borrow varies from lender to lender and state to state. It is also heavily dependent upon the value of your car. The other factor in play here is how much you get paid and the ability it gives you to repay a loan. In general, though, loan limits are between 25% and 50% of the total value of the car.

Loan Applications and Credit Histories

One of the advantages of applying for car title loans online – or in person — is the fact that lenders usually don’t bother with running a credit check. If you have the title to a car and can demonstrate an ability to repay the loan, you’ll usually see your application funded. This is because your vehicle will secure the loan. If you fail to repay it, the lender will seize your car and sell it to recover the money you owe them.

This is in stark contrast to the way banks, credit unions and finance companies process loan applications. These entities rely heavily upon credit checks to determine the creditworthiness of a potential borrower. 

In other words, they routinely make inquiries with the credit bureaus about the payment history of an applicant. Ironically, these inquiries actually lower credit scores. According to the credit-reporting bureau Experian, a request for such a review can lower a credit score by as much as five points. On the other hand, paying one of those loans as agreed will have a positive effect on your score. This is true both while the loan is active and once it is paid in full. 

Car Title Loans and Credit Scores

This, however, is usually not true with car title loans. Most title lenders do not communicate with credit bureaus at all — unless they have to repossess the car. This means your score won’t drop as a result of submitting an application. But, it also means your score won’t go up when you repay the loan according to the terms of your agreement with the lender. 

When all is said and done, the only way a car title loan will usually have an affect on your credit score is if you fail to pay it off and they take your car. These seizures are sometimes reported. Even here, though, it should be noted that this does not hold true for all car title lenders, Some of them will just seize the car, sell if for what they can get and never report it to a credit bureau at all.