Title loans are a type of secured loan that usually uses the borrower’s car as collateral.
Title loans can be a good option for people who are looking for a loan for bad credit and still own a car.
In this article, we explain how title loans work and consider the benefits and drawbacks.
What is a Title Loan?
With a title loan, the borrower must be the owner of the title of the car or other asset being used to qualify for a title loan.
In this approach, the asset serves as collateral for the loan in the event that the borrower fails.
Unlike standard personal loans, title loans have fewer credit requirements and may be offered to applicants with bad credit.
They specifically state that the applicant’s credit history or credit score will not be utilized to decide whether he is qualified for the loan.
Consumers thinking about taking out a title loan should pay special attention to the fine print. The interest rates on these loans may be quite expensive. Failure to pay according to the loan conditions may also result in the loss of the car or other asset.
How do Title Loans work?
Car title loans are the most prevalent type of title loan. A potential borrower must own a car outright and sign the title over to an auto loan title firm in this situation.
The lending business will lend the borrower up to 25% of the car’s total worth and will hold the title as collateral in the event of default.
The average amount of a car title loan is $1,000, but it can be more. The loan is typically 15 to 30 days long, although it can be longer.
Borrowers have the option of repaying the automobile title loan in a single payment, usually within one month, or on a multi-year repayment plan.
The automobile might be repossessed by the auto loan title firm if the borrower does not return the title loan in line with the repayment arrangement.
The lending business also has the option of allowing a defaulted borrower to make interest-only payments for one month, thus rolling the loan amount over forever until it is returned.
A title loan is secured against the car of the borrower. The borrower should be the owner of the title of the car – which is where the name “title loan” comes from.
Benefits of Title Loans
Most title loans do not need a credit check.
This is great news if you need cash right away, have tried everything else, and don’t have the credit score to get a regular loan. See also no credit check loans.
Very fast process.
Because there is no credit check, lenders may assess your application and car in only a few minutes.
Once accepted, you can expect to receive the payment within a few days.
Drawbacks of Title Loans
Rollover title loans can trap you in a debt cycle.
More than half of vehicle title loans, according to the Consumer Financial Protection Bureau, turn into financial problems for borrowers.
This implies that debtors keep taking out new loans to pay off previous ones, trapping them in a cycle of debt they can’t break free from. It’s damaging and hazardous since it keeps you in debt for months after you’ve borrowed it.
High interest and fees.
Title loan APRs can reach 300 per cent due to interest rates, financing charges, and other fees. These fees pile up, making your financial commitments even more difficult.
Repayment lengths are generally 15 to 30 days.
In comparison, standard loans often have payback durations ranging from six months to three years, depending on the amount borrowed.
A 15-to-30-day payback period may not be enough time to acquire the funds to repay the loan you took out, especially given the high APR.
You could lose your car.
Car title loans can put you in a bad situation, forcing you to choose between continuing to build up debt and surrendering your vehicle.
Keep up with your payments to avoid the possible hassles that title loans might entail.
According to the CFPB, one-in-five borrowers lose their vehicle to the lender.
Consider your repayment abilities well before you take out a title loan!
The best alternative to a title loan is a payday loan. A payday loan does not require any security, so your assets can stay safe.
Alternatives to a Title Loan
If you have terrible credit, title loans may appear appealing because they don’t require a credit check. They aren’t, however, your only source of funding. Take a look at one of the following options:
Small-dollar loans issued by federal credit unions are known as “payday alternative loans” (not all credit unions are federal).
They’re comparable to title loans, except they don’t require any sort of security. Payday loan companies offer smaller loan amounts but more flexible repayment arrangements, such as making manageable monthly installments over a few months.
While credit card cash advances include their own fees and APRs, the terms are often better than a title loan. The amount you borrow is added to your overall debt, and you’re restricted by the credit limit on the card. There is no grace period; the day the money is borrowed, interest starts to add up.
A personal loan is an unsecured loan for good and excellent credit score customers. If you don’t qualify for a loan on your own, try enlisting the support of a co-signer who has good credit.
Friends and Family
Before applying for a title loan, try reaching out to a trusted friend or family member for a short-term loan.
Their loan conditions are likely to be far more beneficial, and you won’t lose your vehicle if you don’t pay back the loan on time.