A car title loan, or auto title loan, is a way to borrow cash in exchange for giving a lender your vehicle title as collateral. Typically, it’s a short-term loan with a repayment span of one month. People use this type of loan to pay immediate bills or deal with the costs of 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. You then pay off this debt within 30 days but at a higher amount than the lent money 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 easy as long as you have all the necessary documents and information. These include your name and contact information, a government-issued ID, 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 requirements should be within your reach, making car title loans one of the easiest ways to borrow money. Lenders won’t even check your credit scores, unlike other loan options with lengthy procedures and many prerequisites. This means you could get the funds the same day.
You Must Own a Car
Another thing you should know when considering a car title loan is that having a car is a requirement to get the loan. You should possess a title that assigns the vehicle’s ownership to you or any document that will serve as proof of full ownership. Additionally, the vehicle should not have any liens.
Don’t lose hope if you haven’t fully paid off your car. When you’re in a pinch, you can still apply for a car title loan as long as you have significant equity in your vehicle. It must be at least 60%, 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
The Consumer Financial Protection Bureau (CFPB) reports that 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. You should be aware of this before trying to avail yourself of car title loans.
There’s no need to be intimidated, though. Lenders can only repossess your car if you fail to pay the borrowed money as per the contract agreement. Plus, this won’t happen on the first missed payment. Instead, repossession happens 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 ahead with your auto-title loan, lenders will put 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 loan amount may decrease if your car is not fully paid for or you have outstanding loans.
Curious about how lenders decide on your car’s value? They start by assessing your vehicle’s condition and determining whether it is worth the risk. If the vehicle is in tip-top shape, expect it to be higher in value than vehicles that require major repairs. Lenders will estimate your car’s market resale value. After doing this, they’ll offer you a loan amount of less than half of your vehicle’s total value.
These Loans Have a Huge APR
Generally, auto equity loans have terms of only a month, with an interest rate of about 25%. However, many people cannot afford these fees and interest charges from the get-go. Lenders will then offer to roll over the fees and interest into a new loan due the next month. Before you know it, a year has passed, and you’re in for 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. Title lenders also require extra charges, 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, you should not do this if you’re not confident about paying the loan back on time. Doing so may lead to losing your car, or you could end up being caught in a debt trap, kind of like a payday loan but with your car on the line.
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