If you have heard of the phrase “car title loan” and are wondering what they are, you are in the right place. Title loans are alternative secured loans, which means that, unlike personal loans, they are easy to acquire. However, you will have to put down a valuable, in this case, your car, as collateral when borrowing this loan.
If you’d like to borrow money, you must understand this type of secured loan before taking it. Below, we share everything you need to know about how title loans work.
How Do Car Title Loans Work?
A car title loan is also known as an auto title loan. In order to apply, you’ll need a lien-free car title and proof that you are able to repay the loan. This type of loan is a short-term loan, just like a payday loan, and is not typically offered by a bank or credit union. The loan amount you get will depend mainly on the value of your vehicle. The Federal Trade Commission estimates that you can borrow between 25-50% of your car’s value. This translates to between $100 and $10,000, but some generous lenders may let you borrow larger amounts of up to $50,000.
Usually, car title loan borrowers are expected to pay back the loan within 30 to 60 days of borrowing money. The title lender keeps your vehicle title until you have paid the total loan amount back.
The application process for title loans is quick, and you will be allowed to keep your vehicle. Since title loans are not traditional personal loans, you can easily apply for them from the comfort of your home or a store, depending on your lender. However, you will need a few documents, including your photo ID, license, and vehicle title.
Some title lenders may also request to see your vehicle and that you furnish them with an extra set of keys and hand over the title after they approve your loan request. You will then agree to the title loan agreement and sign it. Some lenders may install GPS tracking devices on your vehicle so they can keep track of your location all the time.
The lender determines the terms of your loan. For example, their terms may state that you must make a single lump-sum payment at the end of the loan period, which is 30 days at a 25% interest rate. You will pay back the loan amount and the interest during this time.
However, it would be best to be careful when applying for a payday or car title loan, as these also have some disadvantages. For example, they have higher interest rates than loans provided by federal credit unions and banks. In addition, you may lose your car if you fail to pay back the loan according to the terms.
How Do Car Loans Differ From Title Loans?
Car loans and auto loans are different even though they sound similar. An auto loan is issued to you when you want to buy a car and does not have enough money to pay for the car outright. Instead, you buy the car with a personal loan and then repay it with interest as agreed over a period. On the other hand, a car title loan is what we are focusing on in this blog. It is a short-term loan with interest that uses your car as collateral. Unlike auto loans, car title loans are not used to buy cars.
Do Title Loans Affect Your Credit?
Title loans do not affect your credit score because the lender will not always do a credit check during the application. The lenders do not report your payments either, and they will not send you to a debt collection agency.
The fact that your title loan will not affect your credit score can be a double-sided sword. For starters, if you have a poor credit score and own a car, you cannot access a personal loan but can still quickly get this loan. Furthermore, missing out on payments will not affect your credit score further. However, the repercussions could be just as significant if you fail to make on-time payments. You will risk losing your car, which may affect your quality of life and cause more financial hardships as you will not improve your situation enough to qualify for traditional, less expensive loans.
Title Loans for Military Members
If you are a military service member needing a title loan, it pays to know that you and your dependents have special protection from the Military Lending Act. By the law, lenders must charge a maximum annual percentage rate of 36% for loans that must be repaid in 181 days or less.
Furthermore, with this protection, lenders cannot access your bank account or use your check, cannot require legal notices, nor stipulate arbitration. Lastly, they must disclose your rights and the terms of the loan.
The agreement becomes void if you take a loan with a lender violating these rules. However, you should note that the loan costs can quickly become onerous, especially if you get into the habit of rolling over the loan.
What Are The Downside Of A Title Loan?
While title loans are easy to obtain and can be a good idea, especially when you need a short-term loan, they have some disadvantages, and some people even view them as predatory. We discuss these disadvantages below:
They are Expensive
Title loans are fast and efficient, but you will pay for this easy access through interest. The loans typically have a high annual percentage rate of around 300%. You will be charged interest rates of approximately 25% per month.
For instance, if you borrow $2000 with a monthly fee/interest of 25%, you will repay $2500 at the end of the month. Remember, this amount will not include any additional fees that may be part of the agreement.
Therefore, if you fail to pay your loan on time, you will accrue more charges, and the problem could worsen.
You Risk Getting Into a Debt Cycle
Even the best of us find ourselves unprepared sometimes. When you least expect it, you could find yourself unable to repay the loan payments for your title loan at the end of the month. If this is your case, your lender may roll over the loan giving you a new one. Remember, the new loan will also add interest and fees to what you already owe.
While this may seem like a reprieve for you when you are having trouble paying the loan back, it is only temporary because, in many cases, borrowers end up paying more in terms of interest rates and fees than they borrowed when dealing with title loans. This happens when costs keep piling up each month, and you cannot keep up and pay the amount in full.
You Risk Repossession
Apart from the two disadvantages we have mentioned above, getting a title loan can be cumbersome when the lender chooses to repossess your car once you cannot repay the loan.
It is estimated that one in every five people who take out title loans end up with their car being repossessed, and it is more likely that this will happen the more you are unable to pay according to the terms of the agreement. In addition, with repossession, you lose your ability to move freely, which could affect your quality of life. Couple this with a loan balance you can still not pay, and you have a recipe for disaster.
Alternatives to Title Loans
Now that you understand the pros and cons of choosing auto title loans for your needs, you can make a wise decision. Below are some alternatives to title loans.
Payday Alternative Loans
Payday loans are short-term loans offered by federal credit unions. Usually, these loans are affordable compared to other alternatives you would have, such as payday loans.
The National Credit Union Administration sets guidelines that govern the terms and costs of payday alternative loans. Some of the terms governing this type of loan include a maximum of 28% in interest and reasonable amounts of application fees.
There are two types of payday alternative loans.
Payday alternative loans are those with a limit between $200 and $1000 with repayment terms between one month and half a year. Those who take this type of loan must have been part of the credit union for at least a month before application to qualify.
Payday alternative loans II are available for up to $2000. The terms range from one month to a year. There is no membership requirement for this type of loan, as you can qualify as soon as you join the union.
The APR for this type of loan is not usually as high as that of title loans, so that it can be a good alternative.
Credit Card Cash Advance
A cash advance allows you to borrow a specific amount against your credit card credit line. You should expect to pay a fee for the service.
Note that a cash advance differs from using your debit card to get cash, as the money does not come from your bank account. Instead, this cash will be added to your credit card balance. It also comes with higher interest fees than a typical purchase would, but it is still a better alternative compared to the terms that title loan lenders offer.
Cost of Cash Advances
Your credit card issuer will charge you a fee for a cash advance. This amount can vary depending on your issuer. As such, it can either be a flat rate or a percentage of the amount you want. Your bank may also charge you a fee for this transaction, as with others. Be careful when using this option because how much you borrow could affect your credit score. Different issuers offer cash advances at banks, ATMs, and thorough checks.
Friends and Family
Instead of immediately resorting to a title loan, it would be better to ask around family members and friends who may be willing to offer you something. Borrowing from people you know could prevent you from working with loan companies that will impose harsh interest rates and penalties on you at the slightest inconvenience.
It is also easier to work on an easy repayment schedule with family and friends than with an auto title loan company that will require you to sign a contract that stipulates their terms. Remember to pay any loans you take out from family and friends on time to avoid having a strained relationship with them. If possible, have a repayment plan to ensure everyone is happy with the result.
Negotiate with the Creditors about Your Car Title Loan
Many loan borrowers jump to conclusions and think the best way to avoid serious repercussions would be to take another loan with their creditors. However, creditors are as human as you are. In some cases, they could allow you to negotiate new terms, offer a different payment schedule, or allow you to pay for your loan over a longer period than initially intended.
Therefore, there is no harm in asking. In addition, you may find that your creditor may be more than willing to work with you on different terms.
A car title loan may be necessary when you need a quick solution for your financial issues. These loans are unconventional and are offered with your car as the collateral and other requirements for a title loan. They are easy to get compared to personal loans. However, you have to be careful when taking these loans. It would help if you were vigilant because you may find yourself in a cycle of debt where you pay one and need the next. In addition, these loans have a high annual percentage rate, and you may find your car being repossessed if you do not pay the loan according to plan. However, you can negotiate payment terms with your lender before it gets to repossession.