subject: Benefits And Drawbacks Of Title And Traditional Loans [print this page] Title loans use a collateral method as a security for a loan, specifically the title of an asset. An asset title, whether it is a vehicle, property, or something else, is the legal proof of ownership. For a title loan, the borrower secures the loan by leaving the title of the asset with the lender. In the event of default, the lender has legal right to lay a claim to the title of the asset.
How Title Loans are Calculated
The most common title loan takes the form of a car title loan. The loan is calculated based on your income, and the value of the vehicle. Lenders will establish repayment terms and then provide a cash loan.
Benefits of Title Loans
In comparison to an unsecured loan, a title loan often has a lower interest rate. This is due to the inclusion of the asset as the collateral against default. Lenders are more apt to lower interest rates when there is a physical asset tying the borrower to the debt repayment.
In a lenders eyes, the possession and legal right to claim ownership of the title asset is often financial incentive enough to approve loans, as they are in a way guaranteed their loan repayment in one form or another.
Drawbacks of Title Loans
Title loans have gained a bad reputation due to their use by predatory lenders. Given the tendency for credit and financially challenged individuals using lending services such as payday loans, there is often a higher risk that the asset title will be forfeited. A regular payment schedule is also not recorded on a credit score, and does not help a person build credit.
Traditional Loan Models
A traditional loan is usually acquired through a more established institution like a bank or credit union. There are procedures that are followed when considering the loan, and the decisions are weighed against the risk management model of that particular institution.
Traditional Loan Factors
Unlike title loans used by alternative lenders, traditional loans do not usually require an asset collateral. The loan is approved on standard lending factors such as income, credit score, and the size of the loan.
Benefits of a Traditional Loan
Traditional loans tend to not require collateral as they are based on the strength of the applicant. Most loans that use credit score as a criteria are approved with a lower, more manageable interest rate, and there is often flexibility in dealing with payment arrangements, should the borrower run into financial difficulty. Regular payments will also help build a higher credit score, and inversely, lower interest rates on future loans.
Drawbacks of Traditional Loans
Since the approval or denial of a traditional loan is based on the credit of the applicant, someone who has had a poor history often has trouble getting approved, and thus rebuilding their credit.
In an ideal situation, a traditional loan is the better option, as there is less stress in dealing with a secure financial institution, and the interest rates are lower. Title loans do make it easy for you to get cash, but settling the debt may end up costing more than you bargained for.
