Unexpected expenses are bound to occur. If you don’t have the cash on hand to pay for a bill, medical cost, or an emergency, getting a loan may seem like the best option.
It’s important to realize that all loans are not the same.
Each loan option comes with different requirements, fees and interest. If you have bad credit, you may find yourself with loan options that have higher fees and interest rates.
If your credit score is under 600 and you need a loan, one option you may want to consider is a title loan.
What Is A Title Loan?
A title loan is a loan that requires you to put up an asset as collateral. This asset is usually the title for your vehicle. With title loans, your credit score is not taken into consideration and it’s easy to get approved for the cash you need quickly.
How it works is you’ll have to own your car outright and temporarily sign the title over to the loan company. The loan company will provide funds for up to 25%- 50% of your vehicle’s value. Title loans can be approved for as little as $100 and the idea is to pay them off quickly because the fees are typically high.
The FTC states that title loan lenders charge an average of 25% per month to finance a loan which translates to an APR of around 300%.
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Title Loans Vs. Personal Loans
Personal loans are more traditional loans with longer payment terms. You may have anywhere from 2 - 5+ years to pay back the loan and you can usually borrow $1,000 - $35,000+. The money can be used for any purpose.
Some people choose to get a personal loan to cover an emergency, fund a large purchase or consolidate debt. For example, you may have a few high-interest credit cards that you want to pay off. If a personal loan has a much lower interest rate, you can use the loan funds to pay off the credit card debt, then just pay back the new lender and save money with lower fees and interest.
Your ability to qualify for a personal loan will depend heavily on your credit score since, oftentimes, collateral is not required. Personal loan rates range from 5% to 36% depending on your creditworthiness. Every lender has its own requirements, but here’s what you can expect to have if you want to get approved for a personal loan.
Personal Loan Basic Requirements:
- Good credit score - most lenders won't accept a s core lower than 600-640
- Source of income - preferably from a full-time job to prove that you can afford to pay back the loan
- Be at least 18 years of age
- Have a permanent residence
- Provide requested documentation - the lender may ask you to provide proof of residence, employment, etc.
Personal Loan Approval Process
With a personal loan, you’ll want to see if you can get pre-appproved first. The pre-approval process allows you to see if you’re eligible for a loan without actually applying. A loan pre-approval may or may not require a credit check, but you will need to disclose your income and other personal details.
If you’re preapproved, you can see how much money you can borrow, your repayment term options and your interest rate. Realize that the lower your credit score is, the higher your rate will be. There’s also a chance you won’t get approved with bad credit.
If you do get pre-approved however, you can finish the application process and provide any other documentation. Depending on the lender, you will obtain your loan funds within 1 to 7 business days.
Title Loan Basic Requirements:
- Original vehicle title - showing that you own the car outright
- Government-issued ID matching the name on the title
- Current vehicle registration
- Proof of vehicle insurance
- Proof of income - recent paystubs
- Proof of residency - recent utility bill
A title loan lender may require a GPS tracking device be placed in your car until you pay back the loan. This is because your car could be repossessed if you default on the loan and they want to be able to know where to find it if it ever comes to that.
Both title loans and personal loans will likely come with a lien fee or an origination fee.
Title Loan Approval Process:
Since title loans don’t have any credit score requirements, it’s easier to get approved and the process is pretty streamlined. If you have all your documents, you may be able to get approved for a title loan in under an hour and receive your cash that same day.
Loan repayment terms are usually just 30 days so this is a very short-term loan. Keep in mind that the 20% to 30% interest rate that is advertised is not annualized.
This means, if you get a $1,200 title loan with a 25% interest rate, that is actually is a 300% annual percentage rate (APR) because 25 (interest rate %) x 12 (months in a year) = 300.
Keep this detail at the forefront when considering the cost of the loan especially since your car will be on the line.
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Where Can You Get A Title Loan?
There are many places that offer title loans locally and you may even be to apply online. It’s important to note that obtaining a title loan should be considered as an absolute last resort.
If you need money fast, there are better alternatives than a title loan but with a lower credit score, your options may be slim. Before you run out and apply for a title loan, consider these alternative options to help you get the money you need.
Short term bank loan - Even if your credit score is not high, a credit union or bank that you use may approve you for a loan (depending on their criteria)
Credit card cash advance - If you already have a credit card, see if you could get a cash advance. Yes, cash advance interest rates are higher but not always as high as a title loan and you don’t have to put up any collateral
Peer lending - Peer lending platforms like Lending Club may be an option but with bad credit you may not qualify
Community resources - You can always see if there are local organizations or churches that will help provide funding or bill assistance to help you avoid taking out a loan
Make extra money - Consider getting a side hustle or establishing an extra income stream that allows you to earn the money you need quickly. If you just need a few hundred dollars, you may be able to earn that cash or change your budget around.
If you feel like you’ve exhausted your options and are leaning toward getting a title loan, here are some of the top places that offer them:
Are There Bad Credit Personal Loans?
If you’re looking for a bad credit personal loan, you may not fare much better than with a title loan since personal loan interest rates can be just as high since they rely heavily on your creditworthiness.
Payday loans are short-term loans that come with lots of fees and an APR as high as 400%. You may be stuck spending more money with a payday loan vs a title loan but it really depends on the company’s rates and fees.
On the flip side, if you do qualify for a personal loan you should prioritize this option. If your credit score is around 650, try to get pre-approved for a personal loan first before considering s title loan.
Is It Easier To Qualify For A Title Loan Or A Personal Loan?
It’s definitely easier to qualify for a title loan but it will come with a cost. If you can’t obtain a personal loan at a reasonable rate or just don’t qualify, a title loan can help you get the cash you need - perhaps on the same day.
Just know that it won’t help build your credit, and you could lose your car if your loan goes into default. Before you apply for any loan, make sure you have carefully assessed the total costs and have a clear plan of how you’ll pay back the loan in time.
By Chonce Maddox - Founder - My Debt Epiphany