Quick money is what car title loans are all about, therefore they appeal to folks who need quick money for personal expenses and liabilities. But here’s the catch. The convenience and speedy response come with hefty interest rates and possible vehicle repossession. Read to know more about car title loans and their possible alternatives.
What is a car title loan?
Using the title to your vehicle as collateral for a short-term loan is what car title loans are all about. And it allows you to borrow up to a set sum or a specified percentage of the car’s value. If approved, a title loan might provide you the cash you need as soon as today.
However, if you fail to make timely payments, the lender may take back your vehicle. Lenders offering auto title loans prefer to make loans on fully paid-off automobiles, however, some may also provide financing for vehicles with outstanding balances. A registration loan is a type of title loan used to pay off an existing auto loan.
Loan amounts, interest rates, and other stipulations will vary by state and lending institution. Loans secured by a car’s title typically cost $1,000 but can go as high as $10,000. The standard loan time for a title to a vehicle is 15-30 days, while certain jurisdictions do allow longer.
You can get 25%-50% of the value of your boat, RV, or motorcycle. Payments may be more than anticipated if costs for things like loan origination, processing, and paperwork are added to the loan balance.
While applying for the loan you will need the vehicle, its title, evidence of insurance, identification, and sometimes the keys. Lenders may also insist that you get a roadside assistance plan or place a GPS tracking device on your vehicle. Even though it’s quick money, the process is tedious.
How car title loans work
A beneficiary takes the car and title to the lender. The loan amount is determined by the lender as a fraction of the car’s estimated worth. In less than an hour, borrowers can get the cash they need, but the lender will keep the title as collateral until the loan is paid back. Generally, a car title loan might be one of two types:
- Single-payment loans often have an APR of 300% and are due in a single lump sum 30 days after the loan is taken out.
- Installment loans allow borrowers to spread their loan payments out over a longer period of time (often three to six months) and carry a higher interest rate (typically around 259%).
Title lenders for automobiles typically have fewer conditions for potential borrowers, such as not necessitating a credit check or evidence of income.
Car title loans – Fact check
One should own their car or have equity in it to get a car title loan
To qualify for a car title loan, you must either have full, free, and clear ownership of the vehicle, with no outstanding loans or other debts, or have a substantial amount of equity in the vehicle.
Pink-slip loans, title pledges, and title pawns are all aliases for auto title loans. Lenders will often also request a photo ID, proof of insurance, and the vehicle itself in addition to the car title.
In exchange for a loan, the title to your vehicle is given to the lender if you apply for and are granted a car title loan. After you have paid off the loan, you will receive your title back.
Title loans come with hefty fees and interest rates
The monthly financing fee for a car title loan is typically around 25% of the loan amount. If you borrow $1,000 for 30 days with a 25% cost ($250), you’ll need to come up with $1,250 plus any other applicable fees to settle the loan.
More than 300% APR is the equivalent of what you’d pay in interest over a year. That’s a lot more than you’d pay with a credit card or any other common type of credit. The APR and total cost of a car title loan are required disclosures made by the lender. You can use this data to shop around for the most competitive rate from many lenders.
You will lose your vehicle if fail to repay your loan
If you receive a car title loan but end up not paying it back in full, including any costs, you may be able to refinance it. Any fees or interest accrued on the rolled-over sum will increase as a result.
The lender can take back the vehicle if you are unable to make payments on the loan. In addition to the overdue sum, you may have to pay additional fees to retrieve the vehicle. If you don’t manage to do that, you’ll have to scramble to locate (and pay for) a different method of transportation.
Pros and cons of car title loans
- It is all quick money with title loans. If your loan is approved, you can receive your loan money the same day you apply.
- Your credit history has minimum to no impact. Most loan providers do not investigate borrowers’ credit histories. Rather, they base their decisions on the collateral provided by the vehicle’s ownership and its value.
- Extremely brief periods of time to make payments are a major drawback. The maturities range from 30 days to 12 months, with certain jurisdictions allowing for many rollovers.
- High rates of interest and fees are typical, with the average rate being 25% per month, or 300% APR, plus any fees incurred for submitting the required paperwork and processing the loan.
- The lender can sell your car and recoup any money they’ve lost if you default on your loan payments.
- You must either fully own the vehicle or have substantial equity in it. In order to get a loan, the car needs to be paid off or nearly paid off. In many jurisdictions, you can only have one auto loan at a time.
- Your loan debt may increase if the lender decides to repossess and sell your vehicle without receiving enough money to cover your outstanding loan obligation.
Alternatives to car title loans
Approach federal credit unions for a payday alternative loan
Payday loans can be quite expensive; however, some federal credit unions offer its alternatives. To be eligible for a Payday alternative loan (PAL), you must have been a credit union member for at least a month. And the loan’s repayment period is anything from one to six months.
However, the PAL application fee must be no more than $20, and the annual percentage rate (APR) cannot exceed 28%. Even while that’s a very high-interest rate, it’s still significantly lower than the APR you could have to pay on a payday loan, which can reach 400%.
Opt for a personal loan with a co-signer
When applying for an unsecured personal loan, having a co-signer with good credit can be helpful. Unfortunately, co-signers are required to assume a great deal of responsibility. And it’s difficult to find someone who can deal with it.
In the case of a co-signed loan, the co-signer assumes equal responsibility for its repayment alongside the borrower. Both of your credit scores can drop if you fail to make a payment. This is comparatively better than title loans.
Use a cash advance from your credit card
You may be able to borrow money at a lower interest rate with a cash advance from a credit card than with a car title loan if you have a positive available balance.
However, annual percentage rates (APRs) for cash advances are frequently in excess of 27%. And it is significantly higher than the APRs for other types of purchases. In addition to the APR, you should be aware that there will be a cash advance fee applied. Normally, the cash advance fee is roughly 5%.
Are car title loans worth it?
In short, it’s not. Payday loans can have APRs over 1,000%, but car title loans don’t even come close to that. In most cases, an annual percentage rate of 36% is considered to be the limit of what is deemed to be a reasonable cost of borrowing money. Title loans for automobiles are already quite pricey; the fees and repeat borrowing that come with them further make matters worse.
Plus, you risk having your car repossessed if you are unable to make the required payments. The vast majority of people who take out single-payment loans end up renewing their vehicle titles many times, which results in additional interest and penalties.
According to the CFPB, only 12% of single-payment borrowers actually pay off their loans in full and don’t roll them over. A third of the remaining debtors extended their loan renewals by seven or more times. To borrow $1,000 would cost you a minimum of $1,750 in fees.
Does taking a car title loan affect your credit?
Lenders often do not record loan repayments to credit bureaus, therefore loan repayment will not improve your credit score. Your credit score won’t take a hit if you default; the lender can just take the automobile back.
When you need money quickly, a car title loan may be your best bet. However, the risks are not worth the costs, and you may find yourself in a far worse financial situation after taking out the loan.
If you have no other choice than to get a car title loan, research the lender thoroughly. Title lenders are required by law to disclose all fees and interest rates in writing prior to you signing for a loan. Make sure you get a clear picture of what you are getting into before you sign up for one!
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