How Do Car Title Loans Work? Are Title Loans a Good Choice?
Suddenly finding yourself short of cash to pay an urgent expense like a medical, repair or utility bill can come as a major shock. You may think that a bad credit score rules out getting any kind of emergency loan - what are you supposed to do?
Luckily, there are some options still available to you. A car title loan, in particular, can make your life a lot easier. Other kinds of title loans do exist, but almost all involve the title to a vehicle.
Title Loans in Brief
- Require you to own the title to a vehicle or other asset (you've paid off the auto loan, for instance),
- Title loans are easy to get regardless of your credit score,
- Approval is very fast, making a title loan a handy option in an emergency,
- Interest rates are high, so you should use title loans with caution,
- A title loan is guaranteed by your vehicle, so it may be repossessed if you don't repay the loan.
Lending companies need to make money, so they like to have some kind of guarantee that the lender - you - will be able to repay the loan amount. With payday, personal and most other types of short-term loans, this assurance is provided by establishing how much you earn and how much credit you're already using. In other words, even if the lender doesn't run a full credit check on you, bad credit will still work against you.
With title loans, on the other hand, the loan process is much simpler. Companies that offer loans for title slips don't care too much about what kind of credit you have; your car serves as collateral for the loan. This means that you can consider title loans only if you don't owe the bank or another company money on the car.
You'll also have to give them your pink slip if your title loan is approved; you get it back once you've repaid the original loan amount as well as any fees and interest. This means that you can get a better interest rate with a title loan, especially if you have a low credit score, but also that you risk having the vehicle taken from you if you can't repay the loan.
Handing over your car title for loan approval may seem a little extreme. Thousands of people take out title loans every day without any problems, though. The important thing to remember is this: if you're absolutely sure that you can make the loan payments, repossession isn't too much of an issue. The unexpected sometimes happens, though. If you're not entirely confident that you can pay off the loan on time, payday loans could be a safer alternative for you. Similarly, if you only need to borrow a couple of hundred dollars, getting a title loan may be overkill.
Getting approved for a car title loan takes much less work than, for instance, taking out a mortgage. Not every title loan company follows the same loan process, but if you have the following ready when you apply, you shouldn't have any problem getting approved for a car title loan:
- Proof of car insurance and registration,
- A driver's license or other identification,
- Photos of the vehicle from all sides,
- The VIN, plate, and mileage numbers,
- Proof of income, such as a salary, social security or unemployment benefits,
- Personal references (the names and phone numbers of a couple of people who know you),
- Proof of address.
Note that title loans aren't available in all states; to find out whether you can take one out, just enter your zip code on a website like DirectLoanTransfer.com. In some cases, the lending company may also want you to get additional insurance so that damage to the vehicle doesn't affect their ability to recover the loan amount.
One of the advantages of title loans is that you can borrow a relatively large amount. Most title loan companies will be willing to advance you at least 25% of the vehicle's value, many will let you borrow as much as half, and a number are willing to make a loan for as little as a hundred dollars.
Title loans are essentially risk-free for the lender. If a loan isn't repaid, they simply repossess the vehicle and sell it to recover the outstanding amount. They are therefore inclined to make a loan for several thousand dollars without a credit check. You should know, however, that it is not the lender's duty to verify that you're able to pay back a title loan: this is all your responsibility. In general, you'll never want to borrow as much as you are able; instead, settle for the lowest amount that will allow you to get by.
Auto title loans are also not your best bet for very small sums, due to the flat administration fee many lenders charge regardless of how much money you request. This may run to $100 or more, excluding interest; payday loans are a much cheaper option if you only need a little extra cash for a few weeks.
Compared to other types of secured loans, title loans carry a very high interest rate: up to 300% APR. This, combined with how easy they are to get regardless of your credit score, makes title loans a convenient way to borrow cash in an emergency, but they are certainly not a long-term solution to your financial problems.
There is also the problem of having to hand over your auto title for loans, as well as, usually, a set of keys. This means that the lending company can take your car away from you if you're not able to keep up with the payments. Most will prefer to let you keep driving it, though, which makes interest and other finance charges build up over time.
In other words, a loan of this type carries significant risks. On the other hand, this kind of credit is extremely easy to get. Consider a car title loan when you need a relatively high loan amount and you're not able to wait long to get your cash; in most other cases, a personal or payday loan will cost you a lot less and doesn't place your car in jeopardy.
All of these concepts may seem confusing, especially if you're not used to doing complex financial calculations. There is a simple solution, though: online services like DirectLoanTransfer make it easy to compare all your options without affecting your credit score or signing any contracts. If you need cash quickly, don't go to the title loan place around the corner: you deserve the better interest rates you'll find online.