What is a title loan and how does it work?

Auto title loans are for people who need cash quickly. They offer a short-term loan with the title of your vehicle as collateral. Some lenders do not conduct a credit check and may not even require proof of employment or income, making auto title loans easily accessible even for consumers with a troubled credit history.

But like many other loans accessible to consumers bad credit, the appeal of these cash advances is overshadowed by their high cost and harsh consequences if you fail to pay off your debt. Here’s what you need to know about how title loans work and the pros and cons of using them.

How title loans work

A title loan provides short-term financing for borrowers who own their car outright or have significant equity. Lenders use your vehicle’s title — a document that proves you own your car — as security for the loan, and typically require payment within 15 or 30 days.

Lenders can offer title loans online or through a physical location. You fill out an application to apply. If you’re not already at a brick and mortar location, you’ll need to visit one to introduce your car.

You must also provide a clear title — although some lenders don’t even require it — photo ID, proof of insurance, and any other documents that the particular lender may require. You may also need to give the lender a second set of car keys. However, you keep your car during the repayment.

If you don’t manage to pay off the debt on time, you may have the option of converting your existing title loan into a new one, but that only adds more interest and fees. If you default, the lender can impound and sell your vehicle to recover your debt.

Because title loans can have very high interest rates, not all states allow them. In some they are completely banned, in others there are caps on interest rates. In some federal states, however, there are no regulations.

how much can you borrow

You can usually borrow between 25% and 50% of the value of your car. Loans can range from $100 to $10,000 depending on the lender. You pay off your debt either in person, online, or by automatic payment from your checking account.

How Much Do Title Loans Cost?

With such a short repayment period, auto title loans are an expensive form of credit, and even the best auto title loans can command triple-digit annual percentages that include interest and fees.

“Title loans often come with a number of additional fees, including processing, documentation, and loan origination, that total in the hundreds of dollars,” says Lyle Solomon, principal attorney for Oak View Law Group, which provides debt relief services. “In some cases, the purchase and payment of a vehicle roadside assistance package may also be required.”

For example, let’s say you borrow $800 and the financing fee is 25% of the loan amount, or $200. If the loan is due within 30 days, your APR is approximately 304%. That’s far more than what you pay for even some bad credit personal loans.

“Title loans often fall into the category that many lenders view as bootleg loans,” said James Garvey, CEO and co-founder of Self Lender, which provides loans to lenders.

Do title loans affect your credit score?

In general, title loans do not affect your credit score as there is usually no credit check when applying. Additionally, title lenders are unlikely to report your payment to the credit bureaus, and if you default, the lender will typically repossess your car and sell it rather than sending your debt to a collection agency.

The fact that title loans don’t affect your credit score can be a good thing or a bad thing. If your credit history is already in bad shape, that doesn’t stop you from getting a title loan. Also, missing a payment is unlikely to further affect your score. On the other hand, making payments on time will not help your credit score either.

Pros and cons of title loans

As with any financial product, there are usually both pros and cons. However, the disadvantages of such robbery loans usually far outweigh them. You should note the following:

advantages

  • Easy qualification. Even if your credit is in bad shape, you can get approval as long as you own your car title, you have enough equity, and your income meets the lender’s requirements.
  • Easy approval process. You do not have to undergo a credit check, so the process usually does not take long.
  • Fast access to cash. As long as you have everything the lender needs, you can walk out of the store with the cash that same day.

Disadvantages

  • You can lose your car. The worst-case scenario with a car title loan is that you can’t pay off the debt and the lender confiscates your car. according to a Report 2016 According to the Consumer Financial Protection Bureau (the most recent statistics available), this happens to 20% of people who take out title loans.
  • You can easily get in over your head. CFPB research also found that more than 80% of auto title borrowers take out a new loan on the original loan’s maturity date because they cannot afford to pay off the first loan. More than half of all title loans turn into four or more consecutive loans before borrowers can repay the debt. Because each new loan adds more interest and fees, you could end up owing far more than you originally planned.
  • Title loans are expensive. Even if you repay on time, title loans come with a much higher cost than most other lending options.

Alternatives to auto title loans

If you have bad credit, you may think you have no other options. This is why title loans are still popular despite posing such a threat to your financial wellbeing.

Still, it’s generally best to avoid this financing option. “Almost every other loan option available is better than a title loan,” says Solomon. These alternatives can provide borrowers with bad credit with access to funds without as much risk as an auto title loan.

  • Family and friends. It is not easy to go to family or friends for money. But if you have trusting relationships and are confident that you can repay what you borrowed, consider applying for an unofficial loan.
  • Bad credit personal loan. Some personal lenders specialize in working with people with bad credit. Interest rates and fees can still be higher than what you would pay at Gut or excellent credit, but they’re likely to be much lower than what a title lender will charge you, and you’ll usually get a longer payback period. This reduces the likelihood that you will have to borrow again to pay off your debt.
  • Financial Assistance Services. Depending on where you live, your state or local government may offer access to temporary financial assistance. These programs can provide help with medical bills, groceries, childcare, utilities, emergency expenses, and more. If you’re looking for some quick money to cover these, you might be able to get it with no strings attached or expensive debt. You may also find this type of help at local nonprofits, charities, and religious organizations. Garvey says, “Some nonprofits like the Mission Asset Fund offer loans with lower (or even 0%) interest rates.”
  • salary advance. Your employer may be willing to provide an advance on your next paycheck. While this can cause some problems if you need the money later, it can give you some time to figure things out. If your employer doesn’t offer salary advances, you can use services like Earnin, MoneyLion, Dave, and Brigit to get a salary advance with little or no fee or interest.
  • Payday alternative loan. Some credit unions offer alternative payday loans to eligible members. The interest rate on these loans is capped at 28%, making them much cheaper than even some traditional personal loans.
  • credit advice. If your financial problems are a symptom of crippling debt, work with a Credit Advisor can help you free up more space in your budget. Credit counseling agencies may be able to use a debt management program to help you get rid of late payment fees and lower interest rates on your existing loans. Credit counseling can also help you get your finances back on track for the future. Garvey says, “The ultimate key to breaking the cycle of limited opportunity and high-yield credit is to build the credit you need to access more respected financial products.”

The most important thing is that you take the time to review all of your options and look for ways to get the financial assistance you need without digging deeper into high-interest debt.

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