A title loan is a short-term, high-interest loan that requires your car as collateral to borrow money. If you don’t have good credit and need to take out a loan, you may be looking for places that accept your low credit score or poor credit history. Title loan lenders generally don’t check your credit history, but there are other barriers you may face.
If you’re considering a title loan, here’s what you need to know before you get one.
what is a title loan?
A title loan is a secured loan that allows borrowers to use their vehicle as collateral. Since your car guarantees the payment of the loan, the lender can repossess your car if you don’t pay the loan on time. Title loans are typically short-term, high-interest loans that have few requirements, meaning if you have poor credit, you’ll still have a chance to qualify. many times, credit scores and histories are not considered at all.
how do title loans work?
You can apply for a title loan through a lender that offers one, as long as you own your vehicle outright and have a clear title. During your application, you will need to show your lender your car, proof of ownership (your car title), and your license.
If approved, you will surrender your car title in exchange for the loan. While the lender determines the terms of your loan, title loans generally have 30-day terms, similar to payday loans. this means that you will make a single payment at the end of your loan period. you are obligated to make payments for the amount you borrowed, plus interest and fees. Most lenders charge a monthly fee of 25% of the loan amount, which translates to an annual percentage rate (APR) of at least 300%.
This is where title loans can become a headache. If you don’t pay your loan on time, you can lose your car because it serves as collateral. so if you choose to get a title loan, be sure to pay on time so you don’t risk losing your asset.
how much you can borrow with a title loan
Your loan limit is between 25% and 50% of the total value of the car, and the lender will examine your car to determine its value. some loans are as low as $100, while others are more than $10,000 or more.
when should i get a title loan?
According to the Consumer Financial Protection Bureau (CFPB), 20% of car title loan borrowers have their car repossessed when they cannot pay the loan in full. Car title loan lenders do most of their business with borrowers who continually take out new loans to cover old ones. More than half of car title loans convert to long-term debt, and more than four out of five auto loans are reordered because borrowers can’t pay them off in full with one payment.
Because of this, you should seek alternative financing methods before obtaining a title loan. Alternative payday loans from credit unions, personal loans from online lenders, credit cards, and even borrowing money from friends and family are better options than potentially losing your vehicle.
pros and cons of title loans
Before applying for a title loan, first review the pros and cons. this can help you determine if it’s the right move for you.
pros of title loans
- No Credit Check: Most title loans do not require a credit check. This is good news if you need to borrow cash, have exhausted all other available options, and don’t have good credit to qualify for a traditional loan.
- fast approval and access to funds:
- Fast Approval and Access to Funds: Since there is no credit check, it only takes a few minutes for lenders to review your application and vehicle. once approved, you can receive the funds almost immediately or within a couple of days.
disadvantages of title loans
- potential debt trap: the cfpb says that more than half of auto title loans become a debt burden for borrowers. This means that borrowers continue to take out new loans to pay off old ones, entering a cycle of debt from which they cannot get out. it’s damaging and dangerous, keeping you in debt for months after you initially borrowed.
- Exorbitant interest and fees: The annual interest rate on title loans can reach 300%, due to interest rates, finance charges and other fees. These fees add up, further hurting your financial obligations.
- Short Payment Terms: Title loans typically require payment within 15 to 30 days. Compare this to traditional loans, which typically have repayment terms of six months to three years, depending on how much you borrow. a 15- to 30-day repayment period doesn’t always give you enough time to find the funds to repay the loan you borrowed, plus the high interest rate.
- You could lose assets: car title loans can put you in a horrible position: continue to accumulate a huge debt load or surrender your car. Stay on top of your payments to avoid potential burdens title loans can bring.
title loan alternatives
Almost every option available is probably better than a title loan. here are a few to explore if you find yourself in a bind and need the money.
alternative payday loans
Alternative payday loans are small loans offered by federal credit unions (not all credit unions are federal). They are similar to title loans, but do not require collateral. These loans offer small amounts but have friendlier repayment terms, such as making affordable monthly payments over the course of a few months.
You can borrow between $200 and $1,000, plus interest rates at federal credit unions are typically capped at 18%. What’s more, credit unions tend to work with borrowers who don’t have good credit to find a solution that’s best for them. however, you must be a member of a credit union to obtain an alternative payday loan.
Personal loans are typically unsecured loans you can get from a bank, credit union, or online lender. You can use them for almost anything you need, and many offer disbursement of funds as soon as the same day you receive approval. Even with bad credit, you may qualify for a personal loan.
While personal loans do charge interest, rates typically top 36%, significantly lower than a title loan. however, you will only receive the maximum rate on a personal loan if you have poor or damaged credit. Borrowers with good credit may qualify for rates below 10%. Lastly, payment terms range from two to seven years, allowing you to make affordable monthly payments until the loan is paid off.
When you apply for a credit card, you are approved up to a certain credit limit, which you can use as needed. You are expected to pay your balance generally every 30 days, and you can reuse your available limit as you pay it. unpaid balances will begin to accrue interest; however, credit cards have much lower interest rates than title loans.
If you can afford to pay off your balance monthly, you’re essentially applying for an interest-free loan. Some cards even offer interest-free financing periods for an extended period, such as the first 12 months of card ownership. using an offer like this is a practical way to capitalize on cheap financing.
friends and family
Ask your circle if you can borrow some cash to avoid falling into a title loan trap. Your loved ones probably won’t charge high interest rates the same way payday and title loan companies do. They’re also friendly enough to work out a payment schedule that works for both of you.
however, borrowing money from relatives can cause emotional, and sometimes financial, strain on your relationship. take this route with caution and have a payment plan in mind so everyone is happy with the outcome.