Title Loans and Installment Loans. What’s the Difference?
February 11, 2020 | June Mckaig
What’s the difference between installment loans and title loans? Title loans and installment loans have different requirements, loan amounts, and very different effects on credit. Though they are both loans, these differences make them beneficial in varying circumstances. It’s important to recognize these differences in order to best utilize either. Let’s first define each and then compare the two.
What is an Installment Loan?
Let’s first define what an installment loan is. An installment loan is a sum of money that you take out on a loan, and agree to pay back over a set time period with an agreed-upon interest rate. Typically, an installment loan’s interest rate will be lower than that of a credit card, which can make them useful in transferring debt or managing a sum too large to pay off in only a few months.
Installment Loan Requirements
In order to apply for an installment loan, it is typically necessary to have a good credit score. There are some lenders who do not require this for application, such as at Carolina Title Loans, Inc., but your credit score usually influences a lender’s choice on whether or not to grant you a loan. You will also need:
- A valid state ID
- A checking account statement in your name
- Proof of Income
How Do Installment Loans Affect My Credit?
Most types of lending, including through an installment loan, is reported by the lender to credit agencies. These agencies’ jobs are to keep a record of what you have borrowed, how successfully you have paid it back, and then calculate that into a score between 300 and 850. The higher your score is, the better. This score helps future lenders know if you are a responsible borrower, and how much they might be willing to give out on loan. Before you do any borrowing, make sure you know what your credit score is.
How Do Installment Loans Positively Affect Credit?
As listed on the Wells Fargo website, credit is typically based off of these items: new account activity, payment history, length of history, amounts owed, and diversity of accounts. Just by applying and taking out a loan, you begin your credit journey and tick off boxes in the ‘new account activity’, ‘diversity of accounts’, and ‘length of history’ categories. When you use an installment loan and pay it off on time over time, you begin to create a profile for yourself that indicates you are a responsible borrower, which builds your credit score and opens doors to other lenders and larger sums.
How Installment Loans Negatively Impact Credit Scores
The only way an installment loan would greatly affect your credit score is if you failed to make your payments on time or if you default on the loan, which really, you don’t want to do on any method of money borrowing.
A hard inquiry from applying for an installment loan will briefly lower your score until you have shown that you can responsibly make payments on the new loan. This happens with any newly opened loan, and is not necessarily unique to an installment loan; however, what is unique to an installment loan is paying off your loan early.
If you pay off your loan earlier than the supplied time, there are both positive and negative effects. Positively, you will obviate the interest you would have otherwise paid on the loan, thereby saving money. Negatively, your account diversity and length of history will take a hit once you have closed the loan, which collectively impacts 25% of your score.
What is a Title Loan?
A title loan is a secured loan. But what is a secured loan? A secured loan is a loan where the borrower uses property as collateral. In the case of a title loan, and specifically a car title loan, a borrower’s car is used as collateral in exchange for a loan amount. Usually, this amount is determined by the market value of your car. In the event that you are late on payments or default completely on your title loan, the lender will repossess the car to square away the debt. You can learn more about title loans in detail in this article Everything You Need to Know About Title Loans.
Title Loan Requirements
At CarolinaTitle Loans, Inc., there are a few required documents in order to receive access to a car title loan.
- First, you’ll need a driver’s license or state-issued ID
- You’ll also need a lien-free title to your car
- Lastly, you’ll need your car to be inspected to evaluate its value
As previously stated, no credit check is required and no proof of income is necessary. This makes obtaining a car title loan simple and easy. At Carolina Title Loans, Inc., you can also drive your car while taking a car title loan out.
How are Installment Loans and Title Loans Different?
There are a few details besides requirements that make title and installment loans different from one another. First and foremost, an installment loan is an unsecured loan and a title loan is secured. The very nature of the two differ from another, as do the amounts that can be borrowed, the time-table, and the effects on credit.
Title Loans vs Installment Loans: How Much Can I Borrow and How Long?
Installment loans are usually paid off over the course of several months to a year, whereas title loans are usually expected to be paid off in a month or two. The loan amount also differs, which can make a big difference depending on your usage of the loan. With Carolina Title Loans, Inc., you are able to borrow up to $15,000 on a title loan. This differs from lender to lender, so it’s important to do your research and compare not only loan amounts but payment plans as well.
How Do Title Loans Differ From Installment Loans When It Comes to Credit?
Unlike installment loans, title loans do not require a credit check, nor do they usually report to credit agencies. This is because title loans are secured loans, and they rely on the exchange of your car should you default on payments as opposed to just your good name in credit. This makes title loans appealing to those who need a loan but do not have the credit to acquire one through the bank or other credit-checking lenders.