Do I Need Good Credit for a Car Title Loan?

September 23, 2011

When you apply for many types of loans, from credit cards to a bank loans, your credit score is the most important factor that determines whether you will be approved or rejected. Unfortunately, a history of just a few late payments, or more serious credit challenges such as a repossession, foreclosure or, bankruptcy, or even simply never having had any credit in the past, can make your credit score too low to qualify for these conventional credit-based lending methods. If you find yourself in this situation and you need to borrow money to meet your financial needs, one option that you can consider is a collateral-based car title loan.

Qualifying for a Car Title Loan

When you apply for a car title loan, your credit score is not going to be determinative in whether your loan is approved or not. In fact, in the vast majority of cases, a lender who offers car title loans will not even check your credit. This makes it possible for many people to qualify for financing, even if they have made financial mistakes in the past.

The reason that car title loans do not require good credit is that the loans are “secured” or “collateralized” loans. This means that the lender has something, besides your word and promise to repay, that protects its interests. Much like how a home acts as collateral or security for a mortgage, a car acts as collateral or security for a car title loan. If you do not repay the loan according to the terms that you promise, the lender of your car title loan may repossess the car just like a bank can foreclose on a home. The car title lender can then sell the vehicle in order to recover the money that they lent to you. Because the lender is protected in this way, the risk associated with lending you money is significantly reduced.

Because the car acts as the lender’s security, the value of the car is important when it comes to taking a car title loan. When you apply for the loan, the value of your vehicle is assessed, first to determine if your vehicle qualifies for the lender’s minimum loan amount, and then to determine the maximum amount that the lender is willing to lend you. As long as you own your vehicle “free and clear” (which means that you have the Certificate of Title in your possession and the vehicle is not already pledged as security for another loan), then you can generally qualify no matter what your credit score is.   This comes as a big relief for many people, and allows you to get the money that you need in a quick-approval loan.