Auto title lending is a business like any other financial enterprise: it functions to provide a service and generate a profit. Because we all worry about how much money someone is making off us when it comes to financial transactions—particularly loans—it might help you to understand how the business of auto title lending works. Once you understand a business, you can more easily decide whether to trust it with your financial wellbeing or not.
The world of financial lending runs from loans built on trust to those utilizing some form of collateral. Collateral loans include everything from auto title lending, Registration loans, pawn shops, and banks or credit unions that use your home or vehicle as collateral. At the other end, are institutions that use your credit rating to determine your trustworthiness to repay a loan, or even whether to lend you money at all.
Despite using your home or vehicle as collateral, most banks and credit unions also still require your credit score to determine your loan terms.
If you consistently pay your bills on time, and don’t have a lot of money in loans already, your credit score can be high enough to get you a low rate on your loan. It is the credit reporting agencies’ way of saying you are a good risk and can be relied upon to repay the loan. If your score is low, you will have to pay a higher interest rate on your loan, if you are approved at all.
Auto title and registration lending businesses don’t require a stellar credit rating to lend money because they use a vehicle and your employment as collateral for the loan. However, if a borrower isn’t reliable, title loans assume a lot of risk in lending money to them. If they lend money to someone who then just drives to another state and never returns, that money may well be lost to the business.
So, when people talk about higher interest rates for auto title loans, that open risk factor is the reason why.