So, what is a title loan? Well, title loans are very common and are a type of loan where you use your auto as collateral to take out the loan. These are short-term and usually high-interest loans that allow you to borrow money if you have a less than great credit history. If you’ve been looking for a loan with bad credit then you already know it’s not easy to get one, especially with the usual credit check lenders make upfront. The advantage of a title loan is that a credit check is not usually done but that doesn’t mean there aren’t other issues that could block your loan.
Read on to learn more about a title loan before you start the application process.
- 80% of borrowers reborrow to cover their first title loan
- You put up your car for collateral so if you don’t repay your loan you will lose your car
- Lenders will typically lend you between 25%-50% of your car’s total value
- About 20% of title loan borrowers have their car repossessed
- Title loans can carry an APR as high as 300%
So, What Is a Title Loan?
This is a type of secured loan where you use your car as collateral to secure your loan. Keep in mind that if you default on your loan repayments then the lender can take your car. This is another great reason to understand the ins and out of title loans upfront and make a plan to repay your loan in full and on time. Due to the high interest on title loans, lenders are more likely to extend a loan without doing credit checks to see if you have a good repayment history because they have your car to secure the loan. Again, this allows you to qualify for a loan that you may not have had a chance of getting without the collateral.
How Do Title Loans Work?
If you own your car and there are no liens against its title, then you are eligible to apply for a title loan. Your lender will need to see your license and proof of ownership which would be in the form of your car title so have these ready when you apply for the loan.
Once you’ve received approval from the lender you give them your car title then you get the loan. Title loans can vary in length and your lender will set the length but generally, they are short-term and around 30 days very much like a payday loan.
When the lender delivers your money to your bank it comes in one lump sum which is how you will repay it at the end of the 30 days along with interest and fees. If your loan is for a longer period, it could be monthly payments, again with interest and any applicable fees. On title loans, lenders generally charge 25% of the loan amount each month, which means you’re paying a percentage rate (APR) of at least 300%.
At this high-interest rate or APR, it can be easy to get behind and risk losing your car if you can’t keep up. This is where your repayment plan comes in and needs to be followed because you don’t want to needlessly lose your vehicle.
How Much I Can Borrow Against My Car?
Lenders typically loan you between 25%-50% of your car’s total value. Of course, they thoroughly check out your first to make sure it’s got the value to back up your loan. So, depending on your car’s value you could get as little as $150 up to $10,000 sometimes more.
Should I Get a Title Loan?
As reported by the CFPB (Consumer Financial Protection Bureau), there is a high rate of car repossession due to non-repayment of the loan. CFPB says as many as 20% of borrowers who take out a title loan have their cars repossessed. Lenders who extend car title loans make most of their money from borrowers who keep taking out new loans to pay off their old loans. For that reason, up 50% of title loans go from being short-term loans to long-term debt. The number of borrowers who re-borrow when they cannot pay off their loan in one lump sum is estimated at over 80%.
With such a high re-borrow rate, the risk of long-term debt and losing your car can make other options more desirable. You may want to consider:
- Borrowing from family and friends – There may be someone you know that’s willing to lend you a bit of cash. Just a word of caution, lots of relationships have been damaged to due money issues. Borrow with caution and discuss a repayment plan that you can stick to.
- Applying to your credit union for a payday loan – Talk to a credit union about a small-dollar loan that doesn’t require collateral and has more flexible repayment plans. They also tend to have lower interest rates.
- Using credit card advances – Your credit card will come with an approved credit limit that you are allowed to use without further permission. However, you are meant to pay that balance each month to avoid interest. If you don’t pay any of it or a partial sum then daily interest begins to accrue and can compound quickly. Luckily credit card interest rates while somewhat high are nowhere near as high as title loan rates.
Repay your balance in full each month and you’re getting an interest-free loan for that period. Some cards offer no-interest loans for longer than a month up to a year.
- Looking at a personal loan – These types of loans are usually unsecured loans you apply for through your bank, credit union, or from an online lender like Funding Zest. You can use a personal loan for almost anything. With Funding Zest, you get instant online approval and could have your money in your bank within an hour or by the next business day. We’re a broker so have lenders who even consider bad credit loans too.
Pros and Cons of Title Loans
While title loans may be just what you need just make sure you know the good and the bad before committing to a title loan that way you can make an informed decision.
Title Loan Pros
Credit check not required – Most lenders do not carry out a credit check as your car is used as collateral to back up the loan. If you have bad credit this may be your best bet for getting loan approval.
Approval and receiving funds is quick – Without having to do a credit check, the process speeds up. If the loan is approved, you can have your funds the same day or within a couple of days.
Title Loan Cons
Long-term debt – If you cannot payoff your loan and re-borrow to cover it you could end up in a long-term debt cycle. You could be putting yourself in a very difficult position.
Outrageous interest rates and additional fees – Exorbitant interest and fees: Title loan APRs are as high as 300%, which includes the interest rate, extra charges, and fees.
Repayment terms are short – You’re often required to repay within 15 to 30 days. Typical payday loans or personal loans are often repaid over 6 months up 15 years. The title loan’s super-short payment period may not give you the time you need to collect the funds to pay back the loan.
You could lose your car – If you fall behind in your payments not only is your debt burden growing every day but you then can lose your car.
Do You Know Your Credit Score?
Your credit score may not be as bad as you think. A not-so-bad credit score could give you options other than going for the high-interest rate and short-term that title loans offer. These could be options where you don’t risk losing your car. Check your credit score now.
A title loan has the advantage of ‘no credit checks’. So, if you have bad credit putting up your car as collateral helps you borrow what you need. This also means you could lose your car if you don’t repay the loan. So, before taking out a title loan consider all your options.