Obviously, if you have the opportunity to get a loan based on your good credit score, then by all means, take advantage of that opportunity. You will most likely have lending companies competing for your business and can negotiate lower rates because your credit history gives you bargaining power.
However, for those of us with poor credit histories and no bargaining power, it’s important to be aware of all the credit options available to us. Most, lenders will require collateral. This means they’ll ask us to put up something of value – that we own – as security for the loan. It’s a measure they take to ensure they’ll get their money back one way or another. Either they receive full payment for the loan, or they take our collateral.
So let’s say you have something of value and that “something” is a car. You own the title for that vehicle and in order to get some quick cash, you approach a title loan lender to get a loan, using your title as collateral. Here’s what you want to be sure you find out beforehand:
- Term of the Loan – The bottom line is, how long do you have to pay off this loan? One type of title loan to be avoided is the Title Pawn loan. A Title Pawn is usually a 30 day loan with a balloon payment at the end. Meaning you have 30 days until the full amount of the loan, including interest, is due. This is almost impossible to pay back and can lead to increased debt. So stay away from this type of title loan!
- Prepayment Penalty – Let’s face it, loan companies want your interest payments. That’s how they make money. To ensure they make a profit off of your loan, they discourage early repayment by charging you a penalty for paying your loan off early. So before you sign the loan, be sure to ask your loan officer if there is a prepayment penalty.
- How Interest is Accrued – Most loan companies calculate loans so that the initial payments are applied primarily to interest, with a very small portion of those payments going toward principal. The closer a borrower gets to the end of the term of their loan, the more their payment is applied to principal instead of interest. This is a common practice among moneylenders, and not at all exclusive to title loan lenders. However, there are varying ways of determining interest. For example, is the interest amount determined by the remaining balance of the loan, or is it determined by the full amount of the loan and then divided up into the monthly payment? A loan that only charges interest on the remaining balance of the loan will save you money in the long run. Because each time you make a payment toward principal, the balance of your loan decreases, therefore lowering the amount of interest due on that loan.
Unfortunately, most people with bad credit end up paying more for their loans than people with good credit. But utilizing these tips can keep borrowers from paying more than necessary.