Rebuilt Title Car Loans Explained

You see a used car with a very low asking price. Kelley Bluebook says the price should be much higher. You have to buy it quickly before someone else does, right? Not so fast. First, you need to know about the car's title. Often a very low asking price is an indicator that the car has a branded title such as a salvage title or a rebuilt title. This is why it's important to run a vehicle history report before buying a used car. This article explains what these different types of titles are, why you should be concerned about buying such a car, and why it can be difficult to finance a car with a rebuilt title.

Vehicle Titles

Your car title is the legal document that proves you're the owner of the car. A branded title indicates there's something unusual about the title. The most common branded titles are salvage titles and rebuilt titles. Cars with either title were declared a total loss by an auto insurance company at some point. Salvage title vehicles aren’t considered roadworthy in many states. Another term for a salvage title is a junk title.

Different states have different procedures for handling salvage title vehicles and rebuilt title cars. It's a good idea to check with your state's department of motor vehicles before buying a car with one of these branded titles. You wouldn't want to put the money down for the car only to find that you can’t drive it in your state.

There are several reasons to think twice before buying a salvage title car. You may not be able to get car insurance for it or find an auto loan to purchase it. Also, the vehicle may be unsafe to drive.

What Is a Salvage Title?

A salvage title is given after the car has been declared a total loss due to extensive damage. The loss is usually due to an accident or theft but could be caused by a natural disaster such as a flood, fire, or hurricane.

There are a few reasons that states require cars that have been declared a total loss to have a  salvage title. For one, the buyer needs to know the vehicle may have safety issues. Also, insurance companies need to know what they’re insuring, and salvage title cars are that riskier to insure. Finally, lenders need to know about the condition of the car if it’ll be used as collateral to secure an auto loan. It's almost impossible to finance a car with a salvage title if you plan to use the car as collateral for the loan, which is typical in auto financing. It's also almost impossible to insure.

What Is a Rebuilt Title?

A rebuilt car is a car that was declared a total loss but has since been repaired. A rebuilt title is sometimes called a reconstructed title. In many states, the car has to pass a state inspection before it can be upgraded from a salvage title to a rebuilt title. The rebuilt title certification means the car has been repaired to the point that it's now safe to drive, though it previously had a salvage title and wasn't roadworthy. Once a car has had a salvage title, it can never have a clean title. The best title brand it can have is a rebuilt title.

The Pros and Cons of Buying a Rebuilt Title Car

The biggest pro of buying a rebuilt title vehicle is that it will be less expensive than other used cars with clean titles. As a rule of thumb, the car should sell for 20% to 40% below the Blue Book value of the vehicle. That said, having a cheaper purchase price doesn't mean the car will cost you less in the long run.

If you can get a secured loan where the car serves as the collateral for the loan, you're going to pay a higher interest rate even if you have a good credit score. This is because the collateral has less value than a car with a clean title. The lender will charge a higher interest rate to cover the increased risk. This is one of several drawbacks.

Another drawback is that even though a car with a rebuilt title has been repaired, since it was severely damaged there may be higher-than-normal repair costs in the future. There may also be unknown weaknesses that make the car unsafe. Finally,  if you’re able to insure the vehicle, the insurance will be higher if you have a car with a rebuilt title. That's because your insurer is taking on more risk. 

Usually, buying a car with a rebuilt title isn't a good idea if you're enduring financial hardship. The cost of insurance and the car payments will often make it too expensive. You may be in a good position to buy a car with a rebuilt title if you're in good standing with a credit union. But, the credit union will require you to have full insurance coverage, which may be difficult or impossible to get. You should weigh all the extra expenses involved with a rebuilt title car before deciding to buy one.

Financing a Rebuilt Title Car

It'll be difficult to get financing to buy a car with a rebuilt title. You’ll have fewer options than you would have to finance a car with a clean title. That’s because when you finance a vehicle, the lender uses the car you're purchasing as collateral for the car loan. This is called a secured loan. If you fail to make payments, the lender can repossess the car and sell it to recoup its costs. But this process is more challenging for cars with rebuilt titles.

For one, their value is harder to assess, but they are generally worth a lot less than cars with clean titles. They may also have issues that concern the lender. What if the car doesn’t remain functional until the loan is repaid?  Simply put, they’re a higher risk for lenders, which makes them less likely to finance the car or to do so with reasonable terms. Also, lenders may be skeptical of borrowers seeking to purchase a rebuilt vehicle as it can indicate you’re having financial difficulties.

It’s important to realize that rebuilt title car loans aren’t the same as title loans, which require you to put the title to a vehicle you already own up as collateral for a short-term, high-interest loan. These loans often charge 300% interest or higher. 

Financing a Car With a Personal Loan

You may be able to get a personal loan to finance a car with a rebuilt title. Since personal loans are unsecured loans, the car won't be used as collateral and full coverage insurance won't be required as a condition of the loan. You will still need to buy liability insurance or the minimum cover required by state law, but this will cost less than full coverage insurance. Of course, there's a catch. Personal loans have higher interest rates since there's no collateral. 

Let’s Summarize…

If you're considering buying a car with a salvage title, you may have to pay a lot to get it rebuilt, which is often the only way to make it roadworthy. If you try to buy a car with a rebuilt title, you may have a difficult time financing it or getting financing at a reasonable rate. If you’re able to get it insured, your insurance payments will also probably be higher. You can also expect higher repair costs than you would have with a car that has a clear title. Still, the lower price and the quality of the rebuilding may outweigh these other concerns.