When it comes to title loans in Salt Lake City, Sandy, Provo, or Orem, an interest-only payment option is a privilege. It allows you to obtain instant cash without the pressure of repaying what you owe immediately. Although it is just good for a limited time, the lower monthly payment gives you more financial flexibility, which makes sense if you do not have a regular income or expect to receive more money in the future to pay off your loan.
Before you take out an interest-only title loan, you have to understand its inherent risks as you should when applying for any other financial product.
Qualifying for a loan with interest-only repayment is equivalent to being eligible to acquire a more substantial debt. In other words, this payment option might be available only to borrowers perceived to be reliable.
A title lender assesses the creditworthiness of a customer based on not FICO scores but rather the value of collateral and income. If you can secure your title loan with a salable vehicle and prove that you have the believable capacity to repay on time and in full, your prospective lender might feel more comfortable giving you more money without needing to be paid back ASAP.
There is nothing wrong about taking out a big loan as long as you can pay it off on schedule. However, it becomes a problem if you default on it one way or another.
Stagnant Level of Indebtedness
An interest-only payment option is just introductory. You are required to pay the principal balance eventually, and your title loan might not be amortized. In other words, you might have to repay what you borrowed in a lump sum at the end of the interest-only period.
If your title lender reports to credit bureaus, your level of debt does not change as long as the principal is not paid off. Yes, you can improve your FICO scores with punctual payment, but your credit utilization rate remains high until the entire bill is settled.
Any delinquency can put you in a prolonged state of indebtedness. The worst part is that merely servicing your loan does not minimize its principal at all. If you already have too much debt, to begin with, missing your balloon payment can ruin your credit even more.
Unchanging Prospect of Repossession
A title loan is secured by a vehicle, so failing to repay the principal can cost you your car. Since interest-only payment does not make you less indebted, the specter of vehicle repossession does not diminish.
Sure, you can roll over your loan if you can’t meet the deadline, but the only benefit you can get out of it is to buy you more time to repay. Rollover can inflate the cost of borrowing money, knock points off your credit scores, and give you a higher mountain to climb.
Interest-only payment only delays the inevitable: repay the principal. If you use this option strategically, though, you can manage your title loan repayment and improve your creditworthiness with less stress.