Sometimes, you need cash quickly, and may not have a credit score sufficient to get a quick loan. If you own your car, a car title loan is a potential option.
When you borrow money, you put up a collateral which the lender can seize control of if you fail to pay back the loan. In a car title loan, that collateral is your vehicle. Because the collateral exists, you can secure the loan even with a poor credit score just like you can secure a credit card by paying some money upfront.
You can apply for car loans at businesses, and many businesses offer online title loans as well. But before you do, here are a few important things to know.
- What Do You Need?
In order to qualify for a car title loan, you must own the car outright. This may seem obvious, but attorneys have found this to be a point of concern on many an injury case. In addition, you will need additional pieces of documentation in order to qualify for a title loan. These additional pieces of information include a car title and identification, proof of insurance, and your own personal information.
After you apply, the lender will appraise your vehicle and offer you a loan worth a certain percentage of the car’s value. If your car is worth $10,000, you will normally be offered a loan of up to $5,000. Once you accept the loan, the lender will take your car title though you can still drive the car. When the loan is repaid, your car title will be returned. If you fail to repay the loan, the lender can seize your vehicle and auction it off.
- Expensive Loans
Car title loans are very expensive and should only be used if you absolutely need cash now. A typical car title loans requires you to pay 25% interest per month, and many car title loans will slap on additional fees to make things even worse for you. If you take out a loan of $1,000, you would have to pay at least $2,000 back in just four months.
Because car title loans are so expensive and because many people who apply for them do not have good credit, these loans often end up unpaid. TheConsumer Financial Protection Bureau reported in 2016 that “one-in-five borrowers who take out a single-payment auto title loan have their car or truck seized by their lender for failing to repay their debt.” Furthermore, more than half of title loans become significant debt burdens, with borrowers taking out multiple loans.
Note that taking out a car title loan in and of itself will not affect your credit score as long as you repay the loan. But many borrowers do not, which can make obtaining credit elsewhere even harder.
- State Regulations
For the above reasons, auto title loans are highly regulated. Federal law dictates that auto title lenders must disclose all fees and interest rates. Furthermore, many states including New York, Ohio, and Pennsylvania outright ban auto title loans. Other states which allow loans impose strict regulations such as limiting how much lenders can charge and preventing lenders from demanding a large upfront initial repayment. Florida, for instance, demands that lenders can only charge an APR of 30%, which is a de facto ban.
If you want an auto title loan, first make sure that your state offers one. Given how often these regulations can change, it is often better to check your state government website directly to see what the current laws are.
A Careful Decision
The above facts should make it clear that auto title loans are not for everyone. Even if you have bad credit and need cash quickly, some potential alternatives include borrowing from your friends and family, going to a pawnshop, or talking with your local bank or credit union.
Another thing to consider is, if you have been in the military, debtors will have to get a military status affidavit, usually sourced from the DMDC, or Defense Manpower Data Center. If they don’t do this, they may incur charges and fees, so they will generally take the time needed to do it properly. Note, this does not make you exempt from the payoff of the loan, just an extra step that they may need to take.
But that does not mean that title loans are all bad. If you need a temporary cash infusion for vital purposes and are confident you really can pay it off, a title loan can be a way to pay off bills until things get better. Make sure to do your research, and compare different title lenders instead of going to the one who is the closest or promises the quickest cash infusion.