The Pros and Cons of Car Title Loans
If you find yourself strapped for cash or in need of a quick injection of a large sum, you might be considering seeking out a personal loan. If you are one of the many Americans with bad credit, however, you might have a tough time finding a lender who is willing to dole out an unsecured loan.
Your options might be limited, but one option that is available to you is a car title loan. That is, if you have a car. As long as you have equity in your car, you can use it as collateral in being approved for a car title loan. While they are fairly straightforward – and are meant to be easy to get – car title loans definitely come with their pros and cons.
Before we break down the pros and cons of these controversial loans though, let’s get into the nitty gritty of what they are and how they really work.
How does a car title loan work?
Before we go into the pros and cons, we should go into detail regarding what a car title loan actually is, and how it operates. In every car title loan, the lender will first evaluate the value of your car and then offer you a loan based on what your car is worth. That is not only dictated by the make and model of the car, but also on how much equity you have in your car. If you own the car outright, you will get a more valuable loan than if you still owe money on it.
In some cases, car title loan companies will require proof of income, but overall car title loans are famous for being incredibly flexible when it comes to credit score checks, or even proof that a potential borrower has a bank account.
Now that your car’s value has been determined, the lender will offer you a loan in exchange for holding onto your cars title. They will continue to hold onto your car’s title until the loan is repaid. One of the primary selling points of car title loans is that you can still operate your car while the lender has your title. That all changes if you default on your payments, however. Some lenders even require that you install a GPS tracking device on your car when you get your loan so that the lender can locate your car in the event of a default.
You’ve got your cash in hand and can enjoy it, but don’t it enjoy it for too long because you’re going to have to start paying back your loan almost as soon as you take it out. Car title loans are short-term loans (repayment periods can last just a month) with incredibly high interest rates (annual percentage rates regularly reach 300%). Worse than that, if you find yourself not being able to repay the loan within the specific repayment period, the lender will repossess your car as collateral.
Now that you’ve got a better idea of how car title loans actually work, you might be getting a better answer as to whether or not they are right for you. If you are in a momentary financial pinch – that you can comfortably say will come to an end soon – this kind of loan could be helpful. You can get the money you need now, and safely pay it back within the repayment period. On the other hand, If you are in and out of work and constantly find yourself in tough financial situations, a car title loan is a quick and easy way to lose your car. That would leave you not only in debt – because you can still owe even if your car is repossessed – and without a car. So think long and hard before you actually pull the trigger on a car title loan.
Who qualifies for a car title loan?
One last thing we should cover is who typically qualifies for these loans. Because car title loans are protected loans based on the equity of your car, almost all car title lenders require that you own your car outright. If you do not own your car outright, the title of your car is likely still in the possession of the lender who helped you buy your car in the first place. That will make it quite hard for you to secure a car title loan.
Other requirements depend on the specific lender that you are seeking to get a loan from. Some companies require proof of income. Others require letters of recommendation. Generally, lenders that are more concerned about whether or not you will be able to repay your loan will be able to offer your more favorable interest rates and repayment periods. If a lender is happy to give you money as long as they know they can have your car in the event that you default, you might want to look for a different lender.
What are the details to keep an eye on?
Just like with all loans, car title loans have quite a few factors to keep an eye on before you sign on the dotted line. These are the primary things to make sure you know.
Make sure you know how the interest rate on your loan is going to be calculated. Don’t just looks at the numbers and think that that is enough, do the actual calculations. Car title loans can have incredibly high interest rates, generally close to 25 percent per month, but even that will pale in comparison to what you will owe if you are still on the hook for your loan a year later.Make sure you know the exact penalties are for late payment or nonpayment. If one late payment can lead to the repossession of your car, you might end up decided that it’s simply not worth the risk. The same goes for an uptick in interest rates. You have to be able to plan for the worse, and know what will come in the event that you fail to pay on time or at all. It is also important that you figure out what the mitigation rules are within your loan. If your lender decides to take your car, are you able to take them to court and fight it? If you find yourself having very little power in the contract, it might be best to look for a different company to do business with.
What are the pros?
Now that all of that is covered, let’s go over the pros of car title loans.One pro is that basically anyone with car can qualify. Because you are using your car as collateral, you can qualify regardless of your credit score or financial situation. Another pro is that you can get the cash you need quickly. The application proves is fast for most lenders, and in most cases, you will have cash in hand within 24 hours of your approval. The amount you can apply for is based on the value of your car. Most loans range between $100 and $10,000. Another clear pro of car title loans is that you can still use your car even though your lender is in possession of the car’s title. If you are responsible with your loan and are able to make the payments, it can feel like you are actually getting paid to drive your own car. Of course, this can change very quickly if you are unable to make a payment on your car title loan. If you default on your loan, you will most likely lose your car. While you do have some legal options in terms of keeping your car or buying it back, it is definitely not an ideal situation for anyone. One final pro of car title loans is that, unlike many personal loans that exist on the market, simply taking out a car title loan will have no negative impact on your credit. One way that a car title loan can have a negative impact on your credit, however, is if you default on the loan. If you miss a payment, your credit score will almost certainly take a hit just like it would if you missed on any other kind of payment on a loan. Considering the fact that your car has been put up as collateral in the event of a missed payment though, a dip in your credit score will probably be the last of your worries.
What are the cons of an auto title loan?
So the pros of car title loans have been established, but if you want to be a fully responsible borrower, you’re going to have to know about the cons of car title loans as well.One cone of car title loans is they often offer very high interest rates and fees. Depending on what part of the country you live in and which lender you decide to work with, you could very well end up paying as much in interest and added fees as you would with any payday loan. In order to get the most out of your car tile loan, you’re going to want to do some significant shipping around to try to find the lowest interest rate possible. When you are choosing a lender, make sure you understand everything about it, all the terms, the interest rate, any added fees, and more. Feel free to ask the company to explain each paragraph of the loan. If you find yourself having a hard time understanding all of the terms, or getting the lender to explain them, don’t be afraid to turn around and walk away. Another obvious con of car title loans is that you could end up losing your car as a result of taking out the loan. If you default on your loan, the lender has the right to repossess your car. In fact, according to a study by the Consumer Financial Protection Bureau, one in five car title loan borrowers will end up losing their car as a result of taking out the loan. Because the amount of the auto title loan isn’t worth the full value of the car, the lender can usually get more for the car than they would have if you had paid the loan back in full. If you are in a financial pinch, it can be easy to overlook this very real risk. That would be wholly unwise. Only take out a car title loan if you are certain that you can pay if off within the repayment term that your lender offers you. The final, and perhaps most impactful, con of car title loans is that even if you end up losing your car to repossession, that might not be the end of it all. If you default on your loan and your lender doesn’t end up getting enough money in the sale to pay off the entirety of your balance, you will find yourself still being on the hook for whatever is left. This would mean that you’d literally be paying the company that just took your car because you weren’t able to pay off the loan in the first place. While this usually doesn’t happen because the value of the loan is lower than value of the car, but it can happen if the initial estimate was off.
So, should you get a car title loan?
Now that you know the basics, the pros, and the cons of car title loans, you might be getting a better idea regarding whether or not a car title loan is right for you. It might seem like an easy out if you’re in a financial pinch, but if the cons are any indication – and they should be – you should really consider a car title loan as a last result. Make sure to try to exhaust all your other options first.
As with most borrowing situations – both in terms of secure and unsecure loans – you should really take the time consider whether or not you really need the money. Only you can decide what is truly essential and what can wait until your next paycheck. If you end up deciding that you really do need the money that you can get from a car title loan, it is probably time to start looking for the best deals in your area.