Did you know that there are 276 million registered cars in the United States?
If you own a vehicle outright or owe very little on it, a car title loan — informally known as a “fast auto loan” — can be easy to get. But fast and easy doesn’t necessarily mean good. You’ll pay high fees for this type of loan, and you’ll risk losing your car.
As with any type of loan, you’ll want to do your due diligence and research. Therefore, no worries if you’re unfamiliar with how a car title loan works. You’ve come to the right place.
Keep on reading for our full breakdown of all the essential information you need to know about title loans and how to use your car title to your advantage.
Car Title Loans 101: The Foundation
Subprime financing is often associated with car title loans. Loans secured by a vehicle have a greater default rate than unsecured loans. Loans given to people with low incomes or bad credit scores are generally challenging to get via other means, such as a personal line of credit (LOC).
Some claim that automobile title loans are predatory lending because lenders are taking advantage of needy people who have no other options to get money. Car title lenders’ defenders say the heightened default risk associated with subprime loans entitles them to higher interest rates and collateral.
Additional fees may significantly raise the cost of a car title loan. Rolling over a loan into a new maturity term is an option for borrowers who find themselves unable to make their monthly installments. As a result, the latest loan’s costs and the interest rate would almost certainly be greater than the old one.
If the borrower is still unable to pay back the loan, the lender may repossess and sell the borrower’s automobile.
Loans on a car’s title often range from a few hundred dollars to a few thousand dollars. In most cases, the loan amount is between 25 and 50 percent of the car’s market value, and the precise debt is computed depending on this market value.
You may apply for a car title loan online or in person. If you’re applying for a new license, you’ll need to provide evidence of your vehicle’s title and insurance, as well as your driver’s license. You may also be required to install a GPS tracker and a device to deactivate your automobile’s ignition if you need to repossess it, depending on your lender.
Car Ownership and Car Title Loans: How Does It All Work?
To be eligible for a car title loan, you must own or have equity in your vehicle.
A car title loan is a short-term loan backed by your vehicle’s title. The borrowing period is brief, lasting around 15 or 30 days at the most. Title loans for cars generally vary from $100 to $5,500, or 25% to 50% of the car’s value.
Title loans for vehicles other than cars, such as trucks and motorbikes, are available, too, despite the name “car” title loan. Your vehicle must have either a clear title or at least some equity to qualify for a car title loan.
In certain circles, car title loans are referred to as “pink-slip loans.” It’s called a “pink slip” because of the past’s pink paper used to print California vehicle titles.
With your vehicle title, the lender is likely to want a picture ID and evidence of insurance from you, as well. A car title loan requires you to hand up your vehicle’s title in return for the money you need. Once the loan is paid in full, you will be able to take back your vehicle’s title.
Keep an Eye on the Fees and Interest Rates
In the case of a vehicle title loan, lenders typically charge roughly 25 percent of the loan amount every month in interest. You’d have to pay $1,250, plus any extra costs, at the end of the month to repay a $1,000 30-day vehicle title loan with a 25% charge ($250).
This equates to an annual percentage rate (APR) of above 300 percent. Many other types of financing, such as credit cards, have interest rates substantially lower than this one.
The lender must disclose the APR, and the total cost of a vehicle title loan must be disclosed to you by the lender when you take out a loan. This data may be compared with other lenders to help you get the best deal.
The Worst-Case Scenario: Losing Your Car
If you fail to pay back a car title loan, you might lose your vehicle.
You may be allowed to roll over a vehicle title loan if you can’t pay back the money you borrowed plus all costs. Adding additional fees and interest to the amount you’re rolling over is a bad idea.
There is a $125 charge attached to this particular $500 loan, so let’s assume this is the case. When the 30-day grace period expires, you’ll be unable to make back the whole amount borrowed. Once you’ve paid the $125 cost, you’ll be given a new loan with a 25% fee. To put it another way: You paid a total of $250 in fees on the $500 you loaned if you paid off your new loan. This means that you might find yourself in an endless loop of costs that make it hard to repay the lender.
For those who find themselves in financial difficulty, a lender has the right to seize and sell your vehicle. In addition to the past-due sum, you may have to pay additional costs to get the car returned. There are a lot of things that may go wrong in this scenario. You would have to find (and afford) another way to go about it.
Using Your Car Title for Funding: Explained
Considering the wide world of loans and lines of credit on the market, things can get a bit confusing for the average consumer looking for an alternative source of funding. Hopefully, our guide has shed some light on the intricacies of car title loans.
But, if you’re feeling a bit nervous, you can learn more about how to manage your personal finances by checking out our finance section.