In summary, if you need money quickly, a car title loan, also known as a “fast auto loan,” may be alluring. However, these short-term loans come with hefty fees and can put you in a debt spiral that might result in your car being repossessed by the lender. Editor’s Note: Intuit Credit Karma is compensated by outside advertisers; however, this has no bearing on
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- If you are the sole owner of your vehicle, auto title loans are a practical means of obtaining quick cash.
- However, because these loans have high borrowing costs and require your car as collateral, they are not risk-free.
- To obtain the money you require, think about using a credit card, personal loan, or payday alternative loan as an alternative.
- If you have to use a car title loan, make sure you know what you’re getting into by carefully reading the fine print.
If a loan is not repaid on schedule, there are risks associated with it. But, if you don’t make your payments on time, a car title loan has an especially concerning consequence: The lender may seize your car.
Still, this significant downside doesn’t stop consumers from considering these loans. In 2023, roughly 3.7 percent of consumers took out auto title loans, according to a Consumer Financial Protection Bureau report.
Know the possible consequences of using your car as collateral for a loan before you consider getting a title loan.
What are car title loans?
With a car title loan, also known as a “pink slip loan,” you can borrow between 25 and 50 percent of the vehicle’s value in exchange for providing the lender with the title to your car as collateral.
Auto title loans serve borrowers in need of quick cash who have had credit difficulties in the past. The majority of lenders have minimal credit requirements; some don’t even run credit checks. The application procedure is typically straightforward, and if accepted, funds may be disbursed as soon as the next day or occasionally even earlier.
- Terms of the loan: These quick loans normally have a $100 starting point and a 15–30 day payback period.
- Borrowing costs: These loan products come with steep interest rates. While some states have no restrictions, others have limits on the amount of interest that lenders can charge.
- Accessibility: In certain states, lenders are not allowed to provide customers with auto title loans. In most cases, you must be the sole owner of your car in order to qualify for a loan if you reside in one of the 25 states that allow car title loans. (Note: 12 states offer these loans but with restrictions). Although it is less common, some lenders offer these loans even if you only have a small balance on your auto loan.
How do title loans work?
Car title loans come in a couple of different varieties. Certain loans are single-payment loans, which require the borrower to repay the entire loan amount plus the interest rate charge in about a month. Depending on the lender, installment loans can be repaid over a period of three or six months.
Even though the product name may include the word “car,” these loans may also be available for recreational vehicles, motorcycles, and boats.
You can apply in person or online, but you’ll need to show the lender your car in person. When applying for a car title loan, be ready to provide the lender a clear title, evidence of insurance, and a picture ID. The lender may also want a set of keys. Unless you fall behind on your loan, you will still be the owner of the car during the repayment term.
To demonstrate how these loans operate, let’s say you have a $5,000 car and you need $1,000 in an emergency. With a title loan, you can swiftly obtain the $1,000 by taking out a loan against your car.
Title loans use the collateral on your car in the same way that mortgages do. The loan must be repaid in full, including the high fees the lender charges for providing the funds, in order for you to regain title to your car.
Typically, these fees consist of a 25 percent monthly finance charge, which adds up to a 300 percent annual percentage rate. Even if you repay a $1,000 loan in just 30 days, interest charges will still apply. You could have to pay back the loan in full if you miss a payment and incur late payment penalties.
Additionally, some lenders impose origination, processing, and documentation fees, which raises the cost of borrowing even further. Additionally, you might need to get and pay for a roadside assistance plan for your car.
Downsides to title loans
Graciela Aponte-Diaz, director of federal campaigns at the Center for Responsible Lending, claims that although obtaining a title loan may be simple, there are significant costs and risks associated with this convenient option.
“The loan gets rolled over into another cycle with more fees if you can’t pay it back when it’s due,” explains Bruce McClary, senior vice president of communications at the National Foundation for Credit Counseling. For those who already find it difficult to repay, it puts them in a very tough situation. It is the exact definition of the cycle of debt. ”.
The biggest downside, though, is the potential to lose your car. If you can’t repay the loan, the lender can take your vehicle and sell it to recoup their money. And this isn’t all that uncommon. A study from the Consumer Financial Protection Bureau found that 20 percent of those who take out title loans have their vehicles seized.
According to Aponte-Diaz, there are even worse practices by certain car title lenders. They install a GPS device known as a “kill switch” that can prevent the borrower’s car from starting, which they use to collect debt or make it easier to seize the vehicle. It’s understandable how obtaining a title loan could be a stressful experience given the very real possibility of losing your primary source of transportation.
Alternatives to title loans
Despite the serious downsides, some consumers aren’t convinced they can get approved elsewhere. In fact, a CFPB study found that 48 percent of payday, pawn and car title borrowers avoided applying for other forms of credit.
Nonetheless, McClary advises contacting conventional banks and credit unions to find less expensive loan choices. Alternatively, if you have a credit card available, you can use it to cover your immediate financial needs.
It is worthwhile to look into all of your options, even if you don’t have a bank account, have a low credit score, or have had trouble making wise financial decisions in the past.
McClary remarks, “It’s interesting how flexible these traditional lenders can be.” Many credit unions are eager to assist clients who lack bank accounts. ”.
Apply for a personal loan
Even though having poor credit can make it difficult to qualify for a personal loan, you might still have options. You may be able to qualify for bad credit loans offered by certain online lenders.
Another option is to speak with a banker if you are a member of a credit union and explain your situation. Your credit union may lend you money if your relationship is strong and you have a solid banking history. Alternatively, you can increase your chances of approval by asking a friend or relative who has a reliable source of income and good credit to apply as a co-signer with you.
Seek a payday alternative loan
Payday alternative loans are another less costly option to consider. Some credit unions offer them, but you have to be a member to take advantage of this loan option. The loan amounts are $200 to $2,000, with repayment options of one to twelve months.
There is a $20 application fee cap, and the maximum interest rate you will pay is 28%. Payday alternative loans are therefore more inexpensive than some bad credit personal loans and auto title loans.
Use a credit card
If you have a serious financial emergency, you can also use a credit card. Alternatively, you can use a cash advance to withdraw money from your credit card.
Be aware that the interest rate on cash advances is typically higher than the interest rate on purchases. It can be as much as 30% variable, compared to an average APR of 20% on purchases. 74 percent variable. Furthermore, there is no grace period and interest will begin to accrue immediately. Expect to pay an ATM fee to withdraw funds.
Although McClary rarely suggests increasing credit card debt, he claims that it’s a preferable choice than a title loan because you’ll probably pay a lot less interest.
Vehicle title loans are a practical means of obtaining quick cash. However, the costs are typically not justified by the risk, and you might find yourself in a much worse situation than you had before taking out the loan. Before choosing a car title loan, take into account less expensive options like a credit card, personal loan, or payday alternative loan.
However, carefully review the fine print of any auto title loan you use if you’ve run out of other options. Title lenders are required by federal law to be truthful and upfront about the total cost of the loan, and they must provide you with written loan terms before you sign. If you believe the lender is withholding information, look for another source for your financing.
FAQ
What are the requirements for a title loan in South Carolina?
You must be at least eighteen (18) years old, and you must be able to prove it by presenting a valid ID from the government. You also need a regular source of income and a vehicle with a lien-free title in your name. The latter can include anything from a regular salary or unemployment benefits to a pension or disability.
What do I need to get a title loan in Texas?
The Common Records Needed for Texas Title Loan Applications A borrower typically needs the vehicle title, a current photo ID, proof of Texas residency, and the ability to repay the loan in order to be approved for a car title loan in Texas.
Read More :
https://www.bankrate.com/loans/auto-loans/car-title-loans/
https://www.titlemax.com/faqs/how-to-get-a-car-title-loan/