A car title loan, or auto title loan, is a way to borrow cash in exchange for giving your vehicle title to a lender as collateral. Typically, it’s a short-term loan with a repayment span of one month. It’s used by people who are in need of quick money to pay immediate bills or deal with an emergency.

To elaborate on how these loans work, imagine that your car has a market value of $2,500. If you were to avail of a car title loan, you could borrow about $1,250 from a lender of choice. You can then pay off this debt within 30 days, but at a higher price due to the interest rate and other fees.

Considering applying for an auto title loan but still want more information? Check out some of the things you should know below:

Offer Quick Cash With No Credit Check

The application process for a car title loan is a breeze as long as you have all the necessary requirements. These include your name and contact information, a government-issued ID with your name on it, and two or more references to vouch for your identity. You must also submit the original vehicle’s title of sole ownership, its registration, and proof of insurance.

All these are within your reach, making car title loans one of the easiest ways to borrow money. It’s unlike other loan options with lengthy procedures and many prerequisites. Lenders won’t even check your credit scores, meaning getting the funds the same day you applied for them is possible.

You Must Own a Car

Another thing you should know when considering car title loans is that having your own car is a requirement. You should possess a clear title or any document that will serve as proof of complete ownership. Additionally, the vehicle should not have any liens.

Don’t lose hope if you don’t have 100% car ownership, though. When you’re in a pinch, you can still avail of a car title loan so long as you have significant equity in your vehicle. This means you can still give your car title to a lender and borrow money as long as the car is mostly paid for.

Losing Your Car is a Possibility

Based on the data released by the Consumer Financial Protection Bureau (CFPB), one in five auto title loan borrowers lose their cars. The lenders repossess the vehicle and, in turn, will try to sell it at a public auction or a private deal. This is something you should be aware of before trying to avail yourself of car title loans.

There’s no need to be intimidated, though. Lenders will only have the right to repossess your car if you fail to pay the borrowed money as per the contract agreement. Plus, this won’t happen the first month of being unable to give back your debt. Instead, repossession occurs if you miss a payment for an average of three consecutive months. That, or if the lender believes you cannot pay back the money at all.

Lenders Will Decide Your Car’s Value

Once you decide to go through with your title loan, lenders will start putting a value on your car. In general, you can borrow 25% of your vehicle’s worth. However, this may increase up to 50%, depending on your lender’s estimation. Similarly, the price may also decrease if your car is fully paid for or if you’re involved in any outstanding loans.

Curious about how lenders decide on your car’s value? They start by checking out your vehicle’s condition and determining whether it is worth the risk. If it’s in tip-top shape, expect it to be higher in value than others that had major repairs. Lenders will also go over your car’s resale value in the market. After doing this, they’ll offer you less than half of your vehicle’s total price.

These Loans Have a Huge APR

Generally, auto equity loans last only for a month, with an interest rate of 25%. However, only some people can afford to pay this sum from the get-go. This will lead to lenders offering to roll over the fees into an entirely different loan due the next month. Before you know it, a year has passed, and you’re due a whopping 300% Annual Percentage Rate (APR).

This means you’re expected to pay three times the amount you borrowed in fees and interest rates alone. There are also extra charges that title lenders require, like processing and loan origination fees. You’d also have to shoulder all add-on expenses, including GPS and roadside service plans.

The Bottom Line

Signing up for a car loan may be a quick and easy way to get money. However, this is not something you should do if you’re not confident about paying the credit back on time. Doing so may lead to losing your car, or you could end up being caught in a debt trap.

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