What’s in a name? Do you really need a literal car title in order to get a title loan?
Auto title loans are a form of fast cash, a personal loan that doesn’t always require a credit check or proof of income. If you have a clear title for your car available — meaning the car is definitively yours — you can use it as collateral in the loan application process.
The maximum loan amount will vary depending on the value of the car. That means you will not be able to get a title loan without a car title to use as collateral. Or if you can, it will be a small loan of $0. At least the payment plan on that loan should be easy to handle!
Let’s review: What is a car title loan, again?
Title loans are a type of no credit check loan generally aimed at people with low incomes and much less than a perfect credit score. Because these types of loans don’t require a credit check as a part of their application process (hence the name), they can be a financial option for folks who are locked out from traditional personal loans and need quick cash. Other types of no credit check cash loans include payday loans, pawn shop loans, and cash advances.
Unlike payday loans, which are unsecured loans, title loan companies require the borrower to put up collateral as a part of the loan agreement. Translation: They require the borrower to put up the title to their car, truck, or other motor vehicle in exchange for the cash — hence, the name “title loan.” The title must be lien-free, which means the car has been totally paid off.
Title loan terms: How does repayment work?
Title loans are short-term loans, with a typical repayment term of only one month. Due to the collateral involved — which reduces the level of risk for the lender — you can usually borrow more money with a title loan than you can with a payday loan or cash advance loan. Even so, you are likely to receive a fraction of what your vehicle is actually worth.
Now, there are some caveats with how title loans work:
Here’s the thing about collateral: The lender gets to keep it if the borrower can’t repay their loan. Additionally, the lender’s claim on your car title gives them permission to repossess your vehicle and sell it in order to make up their losses. In some states like Alabama, the lender may also keep any additional profit they make from the sale. In other states, such as California, the extra profit earned from the sale must be returned to the borrower.
When it comes to interest rates, title loans are much more expensive than a regular loan; they may even outdo many other bad credit loans. According to the Federal Trade Commission, the typical interest rate for a one-month title loan is 25%, which comes out to an annual percentage rate of 300%. And since the borrower can easily extend these types of loans beyond their initial due date (for a cost), those rates and total loan amounts can add up fast.
Again: Yes, you need a clear title to get a title loan
Yes, you need your car title in order to complete a successful title loan application. If you bought your car from any legit car dealer, then you almost certainly have this document. On the other hand, if you bought your car as some kind of handshake deal with a neighbor or a friend from church and the title was never passed over to you, then a title loan simply ain’t in the cards for you.
The other thing you have to remember here: You need to own the car free and clear. What does that mean? You are 100% the bonafide owner of the vehicle title in question. If you took out a loan to purchase that car and still haven’t paid it off? You cannot take out a title loan using that vehicle as collateral. Technically, you don’t fully own the car until any debt that also uses it as collateral has been entirely paid off.
There is one other item you may need to secure your loan: a form of ID, like a driver’s license. Although, if you don’t have one of those, you shouldn’t be driving around in the first place. Get someone to drive you to the DMV and then check back in.
Risk vs. reward
To recap, here are the risks of using a title loan:
As we mentioned earlier, title loans have an average APR of 300%. A title loan that was outstanding for one year would accrue $3 in interest for every dollar that was borrowed. That is not going to help your bank account.
Title loans tend to have a repayment term of about one month. While this might seem convenient, given their high interest rates, you are probably looking at a double-edged sword. It can be hard to pay off a loan so quickly, especially for low-income borrowers, which can lead to extending the loan for an additional month (or longer). Every time a borrower extends the loan, the cost of the loan rises; it also wouldn’t be surprising to see an additional finance charge.
Unlike traditional installment loans, which borrowers pay off a little bit at a time, title loans are designed for borrowers to pay them off in a single lump sum. These “lump sum” payment terms are difficult for many borrowers to manage, which leads to them rolling the loan over into consecutive months in order to save up more money. But since that extension leads to additional interest charges and an overall larger debt, the borrowers end up in the same situation all over again.
Repossession: Lastly, failing to pay back a title loan can lead to the repossession of your car. In fact, a study from the Consumer Financial Protection Bureau (CFPB) found that a whopping one out of five title loans end in repossession.
Consider the repercussions
For many people, especially those living in more rural or suburban areas, losing their car means losing their transportation to and from work. To lose their car, then, would mean losing their job, as well.
It doesn’t matter whether you have your car title or not. No matter how much an unforeseen expense has got you sweating, a title loan is probably not a good answer to your financial needs.
This post was last updated on December 24, 2019. It was originally published July 16, 2018.
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