Car Title Loans

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Important things you need to know before getting a Car Title Loans

At a glance

A car title loan, auto title loan or ‘fast auto loan’ can be a tempting financial solution if you need instant cash.  What is important to know is that this form of short term funding comes with high fee charges. If you are not careful, you may get trapped in a debt cycle and in worse situations, you may even risk losing your vehicle.

Car title loans can be handy for consumers who need quick cash to pay for emergency bills, manage debt among other short term financial needs.  If you have equity in your car, a car title loan-at times referred to as ‘fast auto loan’ is worth considering.

The loans are easy to get provided you meet all the lender’s requirements.  But just like other loans that are simple to qualify for, there are some important things that you should watch out for. First, you may have to part with high fee charges.

The interest rate can also be high for people with bad credit. And that is not enough-you also risk losing your vehicle if you happen to default.

Here are the three most important things that you ought to know before driving your car to an auto lending company.

   1.  You must own or have equity in your car before getting a car title loan

A car title loan is a secured form of financing whereby you use your vehicle’s title as collateral.  Generally, the loan amount ranges from $100 to $5,500, which is equal to 25-50% of the value of the vehicle. 

These loans are short-term in nature, with a loan term of between 15 and 30 days. (But you can still get a longer loan term depending on different factors).  Although it is mainly known as a car title loan, other vehicles can also be used as a guarantee of payment, including motorcycles and trucks.

One of the requirements for a car title loan is a clear title (100% ownership) or equity in the vehicle.

Common question:

What is equity?

Equity is basically the value of an asset (which is your car, in this case) less the amount of debt you have in the asset.

Car title loans are also known as ‘title pledges,’ ‘pink loans’ or ‘title pawns.’ The term ‘pink loan’ is derived from the pink papers that were initially used to print car titles.  Besides the car title requirement, auto loan lenders also require additional information, which includes proof of insurance and a photo ID. They will also want to inspect the car.

   2. Car title loans attract high-interest rates and fees

When applying for a car title loan, it is common to come across lenders who charge a fee of up to 25% of the loan amount per month.  If, for instance, you get a title loan of $1,000 with a term of 30 days and a fee of 25%, you will eventually pay $1,250 at the end of the month, including the additional fee charges. It also means that the same loan has an APR of 300% which is way higher compared to other borrowing options, including credit cards.

Before getting an auto loan, ensure that the lender is clear about the APR and the total cost of the loan. It is equally important to compare rates from different lenders, and only work with one who offers the best rates around.

    3. The car can be repossessed if you default

 If you are approved for a car title loan but do not pay the debt on time, the lender might decide to roll over the loan. This will attract additional interest and fee charges, making the loan very expensive.

Take, for example, you have a title loan of $500 with a fee of $125 and a loan term of 30 days.  You are not able to repay the whole amount due to one reason or another. You, therefore, decide to pay the $125 fee, and the balance is rolled over into a new loan with a fee of 25%.

  If your financial situation improves and you pay off the new loan, the total fees paid will be $250. And if the lender continues rolling over the loan, you might end up in a debt cycle and this will even worsen your situation.

If you are not able to pay back the loan at all, the lender can decide to repossess your vehicle.

Alternatives to car title loans

A car title loan isn’t the only solution when you need a quick form of financing. There are several other options that you can consider which are also less expensive compared to a car title loan. You can also consider Pay Here Pay Here option.

Consider a ‘payday alternative’ from a federal credit union

There are federal credit unions that provide ‘payday alternative’ loans as an alternative to the expensive payday loans.  These payday alternative loans (PALs) can range from $200 to $1,000. To qualify, you must be a member of a credit union member for at least a month.  

You should also be in a position to pay back the funds within one to six months after approval. PALs have an application fee of $20 or less. The maximum interest rate for these loans is 28%.  This rate may be high, but not compared to the payday loan that comes with extremely high APRs. In fact, a payday loan can have an APR of as high as 400%.

Apply for a personal loan with a cosigner

You can also consider applying for a personal loan with a cosigner. The consigner should have a good credit score to qualify for an unsecured personal loan.  But note that cosigners face a lot of risks, so finding a person who is willing may not be easy.

If someone agrees to be a cosigner, he or she will share the responsibilities of paying back the loan. Just a single missed payment can affect their credit score as well.

Apply for a credit card cash advance

Another option is to take out a cash advance with your credit card.  Credit card cash advances have a lower APR compared to title loans, although the APR is also higher compared to regular purchase APR.  Besides the APR, you will also have to pay a cash advance fee which is usually around 5%.

The bottom line

Before you apply for a car title loan, it is imperative to consider other less expensive options. Even if this is the only option to get quick cash, you can compare different choices to get the best APR.  Again, only borrow what you can afford to pay back.

The best way to qualify for cheaper funding options is by improving your credit. You can also consider working with a credit counselor who can guide you on how to manage debts and establish a budget to avoid getting into a financial crisis that may require borrowing.