These days almost anyone can suddenly be met with financial hardships. Unexpected medical bills, car trouble, an unforeseen unemployment and plenty more factors have led millions of Americans to suddenly find themselves in need of cash with nowhere to turn. And as things get worse so does your credit score, which means opportunities to borrow money get fewer and further between. It’s a vicious cycle that’s hard to break out of and one of the reasons certain less-traditional methods of lending money have become so popular. One of these methods is auto title lending. It is a form of loan, usually with high interest, that uses an existing automotive title as the collateral with which someone can borrow against. That way anyone who owns a car and has the valid title to it in their name can immediately borrow a sum of cash regardless of whether they have bad credit history. To understand how this is possible and why auto title lending is available to borrowers with bad credit scores we must first understand how a traditional loan works.
Normally an American who needs to borrow money in a pinch will turn to traditional bank loans. These require a credit application at which time the bank will assess the credit score, borrowing history, amount desired for the loan and risk of getting it paid back in timely installments. This helps make a decision about whether to finance the loan, offer a lesser amount or a worse interest rate, or turn down the applicant outright. For those with bad credit a traditional bank loan is simply not an option. There is to much risk in a down economy and no lenders will finance loans to someone with a spotty financial history.
However auto title lending is available to borrowers with bad credit because most of the time an auto title loan does not even require a credit check. That’s because the auto title itself is used as the collateral, as in the title is what the applicant is borrowing against. In a bank there is no collateral. The loan is given based on the good faith of the borrower’s past finances. But when an auto title is used there does not have to be good faith or a good credit history, because if the borrower fails to repay as agreed the auto title is taken instead as a backup. While this enables even those with very poor credit scores to get loans in a pinch it also puts them in a bind. If they fail to pay and default on the loan it will be reported to a credit bureau and the score can be affected. But the lender will also legally seize the auto title and have the car repossessed. Combined with the fact that auto title loans typically come with much higher interest rates and less of a maximum amount you can borrow it’s clear they are far less desirable than a standard bank loan. But because of the reasons listed that allow them to be available to those with bad credit they are often the easier, and sometimes only, choice