A title loan is a high-interest, short-term loan where you can borrow money using your car as collateral. If you are in need of a loan and your credit isn’t the best, you may be looking for lenders who will accept your bad credit score or short credit history. Although lenders for title loans typically do not run credit checks on you, there are other obstacles you may encounter.
Here are the things you should know before applying for a title loan if you’re considering one.
What Is a Car Title Loan?
One kind of short-term loan where the borrower pledges their car as collateral is a car title loan. They are also known as auto title loans. The borrower must be the clear owner of the vehicle in order to be eligible for a car title loan. The lender seizes ownership of the car and may sell it to recoup the principal amount if the borrower defaults on the loan.
- Short-term secured loans known as “auto title loans” use the borrower’s vehicle as collateral.
- Since they frequently involve high interest rates and borrowers with bad credit, they are linked to subprime lending.
- Sometimes extra measures are needed to lower the risk to the lender, like equipping the vehicle with GPS trackers to help with a possible repossession.
Understanding Car Title Loans
Most people consider auto title loans to be an example of subprime lending. This is due to the fact that most borrowers for these loans have lower incomes or relatively bad credit, making it difficult for them to get other types of financing like a personal line of credit (LOC). Auto title loans typically have high interest rates due to the increased risk of default.
Car title loans are criticized for being predatory loans since lenders take advantage of desperate borrowers with no obvious other options. Proponents of the practice contend that because subprime loans carry a higher than average default risk, car title lenders should be entitled to higher interest rates and collateral.
Using non-annualized interest rates is one contentious practice connected to auto title loans and short-term loans in general. For example, if a lender advertises a ten-day loan with an interest rate of 10% of the total amount due without mentioning whether the interest rate is annualized, the borrower may be tricked into taking out an astronomically high loan. Due to their underestimation of the interest costs when creating their loan repayment budget, these errors may occasionally result in the borrower losing the title to their vehicle.
Additional fees are frequently associated with auto title loans, which can significantly raise the cost of the loan. The borrower has the option to roll over the loan into a newly extended maturity period if they are unable to make their payments. In those cases, there would probably be extra costs and a higher interest rate associated with the new loan. The lender may seize and sell the borrower’s vehicle if they are unable to make payments on time. The Consumer Financial Protection Bureau (CFPB) released a supervisory report in March 2023 that described the existence of illicit junk fees linked to property retrieval, vehicle repossession, and related procedures that are prohibited in borrower loan agreements in the title loan market.
Typically, car title loans are made for relatively small amounts, ranging from a few hundred to a few thousand dollars. The precise balance is determined using the market value of the car pledged as collateral, and the loan amount is typically between 2025 percent and 2050 percent of the car’s value.
You can apply for auto title loans online or in person at a store. In either scenario, the applicant must provide documentation of their driver’s license, auto insurance, title to the vehicle, and the vehicle itself. If the borrower wants to prevent the car from being repossessed, they may also need to install a GPS tracker and a device that turns off the ignition, depending on the lender.
Interest rates on auto title loans are capped at 6% annually under the Military Lending Act. The military annual percentage rate (MAPR) is the term used to describe this cap. TitleMax was penalized $10 million in 2023 for breaking this regulation and giving military families title loans at interest rates higher than the MAPR.
Real-World Example of a Car Title Loan
Taylor recently lost their job, and they are having financial difficulties covering their next rent payment. They choose to take out a short-term loan against the $2,500 current market value of their car through a car title loan. The lender consents to provide a $1,250 auto title loan.
Taylor had to submit additional paperwork and proof of the car’s title as part of the application process. Although the interest rate was advertised as 2020% for the one-month duration of the loan, Taylor assumed that the interest rate was annualized, which was a mistake. The actual annualized interest rate was significantly higher than what Taylor would have knowingly accepted, coming in at 240%.
Taylor was required to repay $1,500 by the end of the one-month term, which is a significant amount more than the approximately $1,270 that they had anticipated. Taylor was forced to give up the title to their car since they couldn’t find the extra $230 given their dire financial circumstances.
How Much Money Can I Get With a Title Loan?
Usually, title loans will pay you up to half of your car’s current cash value. They will sell it for a profit to recover their investment if you don’t repay the loan.
Can a Title Loan Hurt My Credit?
A title loan has no effect on your credit because title loan lenders do not check your credit score or send you to collections in the event of a default.
Are Title Loans Legal in Every State?
In certain states, title loans are prohibited because they may be viewed as predatory lending. While some states try to protect consumers by capping interest rates, others outright forbid them.
The Bottom Line
Title loans for cars can be predatory lending instruments that entangle debtors in cycles of exorbitant interest. To fully comprehend the cost of a car title loan, take into account the annualized interest rate and any other fees before using your car as collateral. Article Sources: Investopedia mandates that authors cite original sources to bolster their claims. These consist of government data, original reporting, white papers, and conversations with professionals in the field. When appropriate, we also cite original research from other respectable publishers. You can read more about the guidelines we adhere to when creating impartial, truthful content in our
FAQ
What happens when you use your car as collateral for a loan?
The largest risk of using your car as collateral for an auto equity loan is that your bank or lender may seize your car in order to collect the outstanding balance. Fees might also apply.
What does title mean in loan?
A car title loan is a brief term loan for a modest sum of money. Giving the lender the title to your vehicle—such as your car, truck, or motorcycle—is the first step in applying for a car title loan. In addition, you pay a fee to the lender for the loan.
Can title loans hurt your credit?
Most of the time, title loans don’t affect your credit. There won’t be a hard inquiry on your credit report if the lender chooses not to perform a credit check. Similarly, since the lender won’t report your timely payments to credit bureaus, they won’t improve your credit either.
Read More :
https://www.investopedia.com/terms/c/car-title-loan.asp
https://www.forbes.com/advisor/auto-loans/what-is-a-title-loan/