Does an Unpaid Title Loan Go on Your Credit?

A title loan is a secured loan where a borrower uses their vehicle’s clear title as collateral. This allows individuals to borrow money against their car, truck, or motorcycle. The loan amount is typically 25% to 50% of the vehicle’s wholesale value. Understanding how these loans operate, particularly concerning credit reporting, is important.

Understanding Title Loans and Credit Reporting

Title loans are a form of secured lending, where the borrower provides their vehicle’s title to guarantee the loan. This collateral reduces the lender’s risk, as they can seize the asset if the borrower fails to repay. Unlike traditional financial institutions, title loan lenders generally do not report loan activity to the three major consumer credit bureaus: Experian, Equifax, and TransUnion. This means payments typically do not appear on a borrower’s credit report.

This non-reporting stems from the collateralized nature of the loan. Since the loan is secured by the vehicle, the lender’s primary recourse in case of default is repossession, rather than relying on credit reporting. Title loan providers often cater to individuals with limited access to conventional credit. Reporting to credit bureaus would not align with their business model, which focuses on the asset as the primary security.

Lenders collect significant borrower information, including personal identification, vehicle details, and income verification. This information is used for internal underwriting processes to assess a borrower’s ability to repay and to comply with various state and federal regulations. This data helps determine loan eligibility and the maximum loan amount offered.

Consequences of Not Paying a Title Loan

Failing to repay a title loan carries direct consequences. The most significant is the lender’s right to repossess the vehicle used as collateral. Once a borrower defaults, the lender typically has the legal authority to seize the vehicle without a court order, though state laws often require a notice period. This notice period allows the borrower time to cure the default.

After repossession, the lender will sell the vehicle to recover the outstanding loan amount, along with any associated fees and costs. The sale can occur through a public auction or a private sale, depending on state regulations. Proceeds from the sale are first applied to the outstanding loan balance, including accrued interest and repossession expenses.

If the sale proceeds do not cover the full amount owed, the borrower may be responsible for the remaining balance, known as a “deficiency judgment.” The ability to pursue a deficiency judgment varies significantly by state law. In some states, lenders are prohibited from seeking a deficiency, while in others, they can pursue legal action. Borrowers should understand their state’s regulations regarding deficiency judgments.

Impact on Your Credit Score

While title loans are generally not reported to credit bureaus, non-payment can indirectly affect a borrower’s credit score. If a lender obtains a deficiency judgment, this public record may be reported to credit bureaus and appear on a credit report. The presence of a judgment can severely damage a credit score.

If the original title loan lender sells the unpaid debt to a third-party collection agency, this can also negatively impact a borrower’s credit. Collection agencies frequently report delinquent accounts to the major credit bureaus. When a collection account appears on a credit report, it can significantly lower a credit score. These negative entries can remain on a credit report for up to seven years from the date of the original delinquency.

These indirect credit impacts affect various components of a credit score. A judgment or collection account primarily impacts the “payment history” and “amounts owed” categories. Such negative marks can make it difficult to obtain future credit, housing, or even certain types of employment for several years.