Does your credit report raise a red flag for lenders? If the answer is yes, then you know how difficult it can be to get cash quickly in case of emergencies. Someone with a low credit score may only qualify for a bad credit instrument, such as title loans.
How Lenders Calculate Risk
Lenders use a number of different factors to calculate the amount of risk a borrower presents. Your borrowing history and current credit status are both important factors. Learning how these are evaluated will help you understand why finance companies may only qualify you for subprime loans.
Lenders analyze many different factors in your profile to determine risk, including:
* Number of Hard Inquires: Every time you apply for a loan, the lenders check up on your borrowing history by requesting a report from the credit bureaus. This is called a hard inquiry. When they notice that you have a lot of queries against your name in a short period of time, they will get the impression that you are in a bad financial situation, and hence a riskier investment.
* Missed payments and charge-offs: Past behavior is the best indicator of future behavior, and lenders know this. If you have demonstrated a history of not paying bills on time, they will be more wary of lending you money.
* Debt-to-income ratio: A high percentage of unsecured debt in comparison to your income will make lenders see you as a bad risk.
* Maxed-out credit cards: These are an obvious sign that you are financially strapped and unable to live within your means. This is also an indicator that you don't have a handle on your finances.
Besides these considerations, there are many other factors that play a role in how finance companies assess potential borrowers. Although some lenders are more lenient, title loans most follow the same set of criteria to decide how much of a risk you represent.
The Debt Trap : How to Avoid It ?
An auto title loan is a secured loan because you offer your vehicle as collateral against it. Lenders know they can repossess your vehicle and sell it to cover the cost of your loan, if you don't make payments on time. Title loans can also help establish a good payment history and improve your credit score if you make payments diligently.
However, you also need to look out for predatory lenders who trap vulnerable, cash-strapped consumers in a cycle of debt. One way to do this is to read all the fine print and understand the terms, caveats and clauses of your loan agreement carefully. If there's something you don't understand in your agreement, talk to a legal expert to clarify what you're getting into.
If you desperately need a cash loan but have bad credit and do not want to spend the exorbitant interest rates that an unsecured loan will cost you, title loans could be your best option. Look for a reputable lender that offers reasonable terms and helps you make affordable payments to avoid repossession of your vehicle.