A car title loan is exactly what it sounds like: a lender gives you a cash loan in exchange for your car title -- essentially, you are using your car as collateral for the loan. The loan amount is usually small, and the loan term is typically about 30 days. Car title loans come with fees and interest rates you must also pay back to reclaim your car title. If you cannot repay the loan in the agreed upon time frame, the lender has the right to keep your vehicle.
Title Loan Requirements
Title loans, also called pawn titles, are not available if you are still making car payments. You must have a lien-free title to borrow because you are offering your personal property as collateral. You will also need to show a valid photo ID, give the lender your title, and complete a detailed application. In some cases, the lender asks for an extra copy of the key to your car or requires you to purchase their affiliated roadside assistance plan.
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Car Title vs. Payday Loans
Car title loans and payday loans are similar in that you are receiving a short-term loan. However, payday loans require proof of employment and an active bank account. Payday loans also generally come with a 1,000 percent interest payment. More than 40 states currently prohibit or restrict payday loans. Car title loans do not require proof of employment or a bank account.
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Car Title Lenders vs. Installment Loan Providers
The language of lending can feel foreign, but it is important to understand the shades of meaning behind each term. A lender may present itself as an installment loan provider rather than a car title lender, and there is a difference. The interest rates for installment loan providers are only slightly less than car title loans. However, some installment loan providers do not hold a car or other personal possessions as collateral. They do verify your income to make sure you can actually afford the loan without sliding down a slippery debt slope.
Approval Times
The approval times for car title loans vary, depending on the lender. If you borrow less than $100, approval can take less than 15 minutes. Most do not lend amounts over $1,000, but for these larger amounts, approval can take a couple of days. Typically, lenders do not check credit, but they will confirm you have some kind of regular income.
Online or In-Person
The age of technology has enabled people to start an application process for a car title loan without ever leaving their home. You can send in scanned copies of your ID, pay stubs, and car title for consideration. This speeds up the process of the loan approval, though you will have to arrange to give the lender the physical copy of your car title. Some people are old-fashioned and prefer to handle the entire transaction in person. Car title lenders generally give you both options.
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Interest Rates
Be sure to ask your lender exactly how much the loan will cost you. Find out the exact amount you must repay, including interest and monthly fees. Often, the interest rate is very high -- it may even be double what you borrow, depending on the state. In extreme cases, car title lenders have charged as much as 300 percent in interest, and every loan has an annual percentage rate or APR added to the original amount, as well; in the end, means a $500 loan could have more than $1000 in interest.
Rollover
Some people encounter circumstances that do not allow them to pay back the money they borrow for a car title loan in the time allotted. Not all lenders will cash in their chips and claim your vehicle at this point; some may extend the loan term for another 30 days. This is known as a rollover and requires you to pay another monthly fee and more interest.
Repossession
If you cannot repay the car title loan, the lender has the option to repossesses your collateral. Generally, the lender sells the car and takes its share of the money you owe from the sale. Often, the lender takes the entire amount of the sale, even if your car is worth much more than the loan and interest combined. With this potential fallout, it is wise to consider all the options before choosing the type of loan for which you will apply.
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Creating a Cycle of Debt
Many people do not realize they are creating a cycle of debt when they borrow through a car title lender. The interest rates alone can make the loan nearly impossible to repay because you must balance this added cost with regular living costs such as rent or mortgage, utilities, food, and gas -- payments you cannot push back until next month. It is important to have a plan for how you will repay the car title loan on time.
Alternatives to Car Title Loans
If you are at all concerned about being able to repay a car title loan, there may be other options that pose less of a risk. Sometimes, creditors will accept negotiations that amount to a bit of extra interest and perhaps a decrease in your credit score, but ultimately leave you with your vehicle. Of course, savings accounts are the ideal alternative, but bank or credit union loans may also be possible if you have respectable credit and employment.
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