Title loans are also referred to as car title loans, collateral loans, or secured loans. They are often characterized by a short payback period and a small borrowing amount. Unlike other types of loans, title loans use your vehicle as collateral. When applying for a car title loan, some lenders usually skip the process of performing a credit check or asking for proof of income or employment even when the consumer might have a poor credit history.Â
Like most loan options available to people with poor credit, the stiff consequences and high costs often overshadow the good part of these loans. If you’re considering applying for a title loan, you need to know how they work, which we have detailed below:
How car title loans work
When searching for how to secure a loan, you’ll likely come across different platforms offering these services. However, the main question is how do you know the options that are safe and legitimate? Legitimate companies usually have a noticeable online presence and physical office. They often require a valid photo ID, proof of insurance, and your vehicle’s title as indemnity for the requested loan. Sometimes, the lender might require you to provide your spare set of keys for your car. Their typical payment structure often falls between 15 to 30 days and you get to keep your car throughout the repayment process.
If you fail to pay the debt before the stipulated time, you often have the option of rolling your existing car title loan to a new one at the cost of more interest. A default in payment can cause the lender to seize your vehicle and sell it off to cover the amount you owe. Before applying for the loan, it’s best to use a title loan calculator to find out the estimated loan payment and interest charges. Due to the high interest rate of title loans, in some states in the U.S., they’re completely banned. In others, they have a maximum interest rate cap while in some, there’s no regulation governing them.
The amount you can borrow
Typically, lenders offer 25% to 50% of your car’s value and the loan often ranges from as low as $100 to higher figures like $10,000. However, the figure varies based on the lending company. Repayment is either done online, in person, or by an automatic payment plan from your provided checking account.
Do car title loans affect your credit score?
In most cases, car title loans don’t affect your credit score, since there’s usually no credit check during the application. Most lenders will not inform the credit bureau of your payment and if you fail to pay back the loan, they’ll retake your vehicle and sell it rather than involve a collection agency.
Advantages and disadvantages of car title loans
Like all financial products, title loans come with drawbacks and benefits. Here are a few things to consider:
Advantages
- Easy to qualify: Regardless of your credit score, you can qualify for a title loan provided you’re able to present your car title document as collateral, and have enough income value that meets the requirements of your lender.
- Fast approval process: Title loan applications usually don’t take long since they don’t perform credit checks.
- Quick cash access: Provided you pass all necessary requirements, you can leave the lender’s office that same day with cash.
Disadvantages
- You could lose your vehicle: The worst possible scenario with a title loan is, failure to repay the borrowed amount will result in your lender seizing your vehicle. Based on findings from a published report by CFPB (Consumer Financial Protection Bureau), 20% of people that obtain a car title loan often lose their vehicle due to their failure to repay the debt.
- High interest and additional fees: Even when repaid on time, car title loans have a higher interest rate compared to other lending alternatives. This is often because lenders accept bad credit. Late payment also attracts extra fees and interest that can make the loan difficult to pay back.
- You can easily enter a difficult situation: According to CFPB, over 80% of people who take title loans obtain a new loan once the original one becomes due because they can’t pay back the first one. Over 50% of people who apply for car title loans end up taking consecutive loans up to four times before they can pay back the debt. Each new loan adds extra fees and interest that can further increase your debt.
While car title loans are an easily accessible short-term way to borrow money, it is essential that you understand all there is to know about this kind of loan.
