What You Should Know About Car Title Loans
Not paying back a loan on time carries the same level of risk as any other type of debt. A default on a car title loan, however, might have dire consequences. Your car may be repossessed by the creditor. It’s important to weigh the benefits of acquiring a loan against the risks involved before deciding on a title loan.
What Are Car Title Loans?
The short-term nature and high-interest rates of title loans mean that debtors with less-than-perfect credit histories may nevertheless be approved. Credit ratings and histories are often completely ignored.
How Do Title Loans for Cars Work?
There are a few distinct types of car title loans available. Some loans require immediate payment in full, including interest, while others have longer payment terms. Payback terms for installment loans typically range from three to six months.
Despite including “car” in the name, these financing options are not limited to just automobiles; they may be used for motorbikes, boats, and RVs as well.
Both online and in-person applications are accepted, but a physical visit to the creditor’s office is required. When asking for a car title loan, you should also be prepared to supply the creditor with a copy of your driver’s license, proof that you are covered by insurance, and a copy of your vehicle’s title.
Lender requirements can include possession of a key. In the absence of a default on the loan, you will be able to keep the car while making payments.
Let’s say you have a car that’s worth $8,000, and you’re in a bind where you urgently need $2,000. You may receive that $2,000 immediately by taking out a title loan and using your car as collateral.
Car Title Loans: Pros and Cons
Think about the perks and downsides of getting a car title loan before committing to one. You can use this information to assist you to decide whether or not to proceed.
- There won’t be any kind of credit check. Loans secured by a car title are often obtained without verifying a debtor’s credit history. If you’re in need of a loan but don’t have stellar credit or any other option for getting one, this is fantastic news.
- Rapid processing of applications and availability of financing. Because of the lack of a credit check, the process of having your application and car evaluated by a creditor can be completed in a matter of minutes.
Once your application has been approved, you can expect to get your funds within a few days at the most.
- The risk of falling into a debt trap. It’s risky and potentially disastrous because it can keep you in debt for a long time after you borrow money.
- Paying outrageous interest and other expenses. Due to interest, finance costs, and other expenses, the annual percentage rate (APR) for a title loan might reach 300%. All of these fees will end up harming your ability to pay your bills.
- Limited time frames for making payments. Most title loans have a short repayment period (between fifteen and thirty days). In contrast, the normal loan length is anywhere from six months to three years.
It can be difficult to come up with the money to pay back a loan at a high-interest rate in just fifteen to thirty days.
- A loss of assets is possible. When you get into financial trouble with a car title loan, you may have to choose between losing your automobile and continuing to accrue more debt. If you want to avoid the hassles that can come with a title loan, make sure to pay on time every month.
What Amounts Are Available Through a Car Title Loan?
Car title loans can be a very expensive type of lending due to the short repayment period and the high-interest rates and fees that even the finest car title loans can impose.
Hundreds of dollars can be added to the cost of a title loan due to origination costs, processing fees, and documentation fees. Additionally, there may be instances where you must buy and pay for a roadside assistance package for your vehicle.
Suppose you take out a loan for $1000 and the interest rate is 25%, or $250. An APR of about 320% applies if you pay back the loan in 30 days. That’s well above what the rates are for even the most expensive unsecured personal loans for people with bad credit.
When Would a Car Title Loan Be a Good Idea?
Most of a car title lending company’s revenue comes from repeat customers who use the money they borrow to pay off previous loans. Since most people cannot afford to pay off their car loans in full with a single payment, over half of all car title loans and over 80% of all car loans end up becoming long-term debt.
This is why you should consider other borrowing options before applying for a title loan. Instead of risking losing your car, you should look into alternative financing choices including credit union payday loans, online personal loans, credit cards, and even borrowing from friends and relatives.
Car Title Loans Alternatives
It’s safe to say that you’re better off without a title loan than with most of the alternatives out there. If you are in a bind and could use some extra cash, consider some of the options below.
- Payday Alternative Loans – Some credit unions, including federal credit unions, offer payday alternatives in the form of small-dollar loans. They function similarly to car title loans but don’t necessitate the vehicle’s title as security.
Even though the loan amounts are low, the loan terms are more accommodating, such as allowing for affordable monthly payments spread out over a few months.
- Personal Loans – A personal loan is a type of loan that can be obtained through a financial institution such as a bank, credit union, or internet creditor.
Many creditors even provide instantaneous access to your money on the day of approval, and you can put the money toward whatever you like. Obtaining a personal loan may be possible even if you have bad credit.
While interest is still charged on personal loans, the APR is often much lower than it would be on a title loan, at roughly 36%. When applying for a personal loan, however, the highest interest rate you can get is if your credit is very bad.
Rates for debtors with excellent credit can drop below 10%. Finally, the loan’s repayment period might be as long as seven years, with monthly installments that are manageable even for the most budget-conscious debtors.
- Credit Cards – A credit card’s credit limit is the maximum amount of money you can borrow from the credit card company. As you pay down your balance, you’ll be able to use more of your available credit. Unpaid accounts will collect interest, but the interest rate on credit cards is considerably more manageable than the interest rate on title loans.
If you can pay off your balance in full every month, you’ll essentially be getting a loan with no interest. There are several cards that provide long introductory interest-free financing periods, sometimes up to a year. Such an offer is a helpful tool for taking advantage of low-cost financing options.
- Friends and Family – To avoid the title loan trap, you should ask those you know if you may borrow some money. A family member or close friend is not likely to charge you exorbitant interest rates like payday or title creditors. Moreover, they are amicable enough to negotiate a repayment plan that suits both of you.
Borrowing money from family members, though, can put heavy emotional and financial pressure on your relationships. Proceed with prudence and have a plan for making repayments in mind to ensure everyone’s satisfaction with the outcome if you choose this path.
A car title loan might be a quick and easy way to receive the money you need. Still, the expenses are rarely justified by the danger, and you may find yourself in a far worse position after taking out the loan than you were before. You should look into other financing options before settling on a car title loan, such as credit cards, personal loans, and payday alternatives.
But if you’ve tried everything else and really need the money, a car title loan may be your only option. Under federal law, title creditors are required to disclose all fees and interest rates in writing prior to you signing for a loan.