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A little collateral can go a long way toward helping you qualify for a loan or secure a better interest rate, particularly when your credit score is less than stellar. Two alternatives when you need cash and want to use collateral are title loans and secured personal loans.
On the surface, these two options may seem similar, but there are important differences between title loans and secured personal loans that you should know about before you borrow. Here's a quick breakdown on secured loans versus title loans.
What Is a Secured Loan?
A secured loan uses your property as collateral. If you default on a secured loan, you may forfeit the collateral you've pledged so the lender can sell it and use the proceeds to pay off your loan. Common examples of secured loans are mortgages, home equity loans and car loans.
Secured Personal Loans
Personal loans may also be secured by collateral. A personal loan lets you borrow a lump sum and repay it with interest in fixed monthly installments. A secured personal loan may help you qualify for a loan you otherwise wouldn't be approved for or get a lower interest rate. This is especially true if your credit score is on the lower end of the spectrum.
Most personal loans are unsecured, but some banks, credit unions and other lenders may offer secured personal loans that use your assets as collateral. Here are a few examples of (and variations on) secured personal loans:
- Share-secured loans: Sometimes known as passbook loans, these loans use your savings account (including CDs or money markets) to secure a personal loan. Share-secured loans are available from banks, credit unions and some online lenders.
- Securities-backed credit: If you have substantial investment assets, you may be able to access a securities-backed line of credit from your bank or brokerage firm.
- 401(k) loan: Although this arrangement is different from a conventional secured personal loan, a 401(k) loan lets you borrow money from your employer-based retirement savings.
- Cash value life insurance: You may be able to borrow against the cash value of a whole life or universal life insurance policy.
The collateral you can use to secure a loan is typically a high-end personal asset, such as antiques, collectibles, precious metals, art or jewelry.
What Is a Title Loan?
A title loan typically uses your car or other vehicle as collateral to secure a short-term, high-interest loan. Auto title loans are aimed at people who might have difficulty passing a credit check. According to the Federal Trade Commission, car title loans share common features that are uncommon in traditional lending:
- Loans have very short terms, often coming due in 15 to 30 days.
- Loans generally top out at 25% to 50% of your vehicle's value.
- Interest rates are sky high: You may pay 25% of the loan amount in fees on a one-month loan—equivalent to an annual interest of 300%.
- You may need to own your vehicle free and clear.
- You may be required to install a GPS device on your vehicle so the lender can track it down and repossess it if you default on your loan.
- Loans may automatically roll over if you don't pay the full amount due. A rollover will cost you a second round of interest plus fees.
A short-term, small-dollar loan could cost you 300% in annualized charges. If you have trouble affording your loan payments, a title loan can easily cost you your vehicle as well, especially if you're borrowing money because your finances are tight. A study by the Consumer Finance Protection Bureau found that 1 in 5 auto title loan borrowers had their cars repossessed.
Title loans are prohibited or heavily regulated in many states, and may not be available where you live.
Title Loan vs. Secured Loan
Though they sound similar and both require collateral, title loans and secured loans follow different paths. Broadly speaking, here are some key differences to look for between typical secured loans and title loans:
| Secured Loan | Title Loan |
|---|---|
| Personal loans secured by CDs or savings, investments or other assets | Most commonly, these are short-term loans that use a vehicle title as collateral |
| Interest rates typically top out at or around 36% | Fees can be equivalent to an APR of 300% |
| Your credit score and credit history help determine your interest rate and loan terms | Often, no credit check required |
| Debt-to-income ratio factors into how much you can borrow | Loan amount may be based on the value of your vehicle |
| Typical loan terms of two to five years | Loans are due to be repaid in 15 or 30 days |
| Loan is paid off at the end of the term | Loans may auto-renew with additional interest and fees if not repaid in full |
| A lien may be put on your asset if you default | May require you to transfer your car's title and provide a set of car keys when you take out the loan |
How to Choose Between a Secured Personal Loan and a Title Loan
A secured personal loan from a bank, credit union or online lender offers several advantages over a typical auto title loan, including much lower interest rates and more reasonable repayment terms. If you'd like to find out what your options are, check with your bank or credit union, or consider using an online marketplace like Experian CreditMatch™ to find secured personal loans that match your credit score.
If you're in need of emergency cash, try these strategies:
- Negotiate with your creditors. You may be able to get a one-time extension on your rent or permission to skip a payment without penalty.
- Look for a payday alternative loan from a credit union. Some credit unions offer short-term payday alternative loans that can float you a little cash. Interest rates are high, but typically lower than what you might get from a payday lender or title loan company.
- Take a cash advance on your credit cards. This can be an expensive option, but probably is still less costly than a title loan.
- Borrow from friends or family, but be cautious about borrowing money you can't repay.
Wherever you decide to apply for a loan, be sure to review your loan documents carefully: Lenders are required to explain your loan's APR and total costs. Look closely at the documentation they provide and, if possible, compare multiple options to help ensure you're getting the best deal. Additionally, make sure you understand what happens to your collateral if you can't make your payments.
The Bottom Line
Using your assets as collateral can help you lower your loan costs or improve your chances of getting approved for the loan you want. Secured personal loans have advantages over title loans, including lower interest rates, longer loan terms and fewer stipulations like auto-renewals that may land you further in debt or at greater risk for repossession. You can use Experian CreditMatch™ to search for secured personal loan options based on your credit score.
Meanwhile, one of the best reasons to build and maintain good credit is to give yourself options when you need a loan. Whether you need a loan now or are considering one in the future, checking your credit score and credit report is a great place to start. You'll get a better handle on what types of loans and rates are available to you, and get suggestions on raising your credit score so you can improve your outlook over time.