What are the Risks of a Car Title Loan?

A signature loan is a type of unsecured personal loan that uses your signature as a guarantee against default. Because there is no collateral used to secure this loan, the interest rates may be higher. This type of loan may also be hard to get without excellent credit and a high income. However, if you can succeed in locating a signature loan, it will come with many benefits for your finances as well as your credit score.

Fast Cash When You Need It

The reason people seek signature loans is they need cash for a specific purchase or emergency. Signature loans are not used like car or home financing that require the funds to be used for a specific purchase. Rather, the borrower can use the loan as he or she sees fit. The loan can be used to consolidate other loans, refinance, pay medical bills or even take a vacation. It is possible to spend the money on more than one thing. Because this is an installment loan and not a revolving line, borrowers receive the entire loan up-front and in cash. 

Lender Assumes the Risk

When no collateral is placed to secure the loan, the borrower assumes the expense of financing the loan. This means higher interest rates and worse loan terms for the borrower. However, when the borrower assumes the expense, the lender assumes the risk. This means there is no asset seizure in the case of loan default. Further, if the borrower declares bankruptcy, the loan will be subordinate to senior, collateralized debt. This means the borrower may settle for a very low amount of the principal in the case of bankruptcy. 

Faster Improvements in Credit Score

Taking and paying off a high-risk personal loan like a signature loan rapidly builds credit. When a loan is secured, paying it off will not largely raise the borrower's credit score because an asset was placed that reduced the affect of the loan on the person's total debt load. If you have a bad credit history but have the ability to pay off a high risk loan, taking one and paying it off can boost your credit quickly. Many people choose this option before seeking a home loan to build a credit score without even spending the money that they receive through the signature loan. For example, a person may take the loan, not use it, and spend only a few hundred dollars in interest payments in order to boost their credit by 50 points in some cases. 

More Appealing Balance Sheet

This last benefit applies most to businesses. Receiving additional financing without posting any collateral can improve your financial profile for your senior loans. The loan appears on a balance sheet as additional equity rather than additional debt. It is like getting more investors for the business. The same does not really hold for an individual because this will still appear as a loan on an individual credit report. 

 

 


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