Title Loans

A title loan is a short-term loan that requires borrowers to offer their vehicle title as collateral. Title loans generally carry high-interest rates in addition to the risk of borrowers losing their vehicle if they’re unable to repay the loan.

What is a Title Loan?

Title loans are known for being extremely risky and expensive options to secure fast cash. The interest rates and short terms make them difficult for borrowers to repay.

A title loan is what’s known as a “secured loan,” meaning the borrower can only obtain cash by offering the lender something of value. In this case, it’s the title to a vehicle. If the borrower defaults on the loan, lenders are legally permitted to seize the collateral and sell it to recoup their losses.

Title loans are short-term loans and are usually due back within 30 days. However, the specific repayment period will depend on the lender and state laws governing loans. Title loans typically carry triple-digit interest rates, making them a much more costly and risky option than many other loans and forms of credit.

How do Title Loans work?

Applying for a title loan can be done at storefronts throughout the U.S. as well as online. When applying for one, whether it’s online or in person, the lender will likely require several things:

    Access to your vehicle in order to inspect it

    Current photo ID

    The clear title to your vehicle

    Proof of auto insurance

    Some lenders require a duplicate set of keys

If your application is approved, you’ll give the lender your clear title, and they will give you cash. The amount you receive will depend on the value of your vehicle. Typically, lenders will offer you 25 to 50 percent of the value of your vehicle. On average, borrowers receive between $100 and $5,500, but depending on the lender and the vehicle, some loans can be upwards of $10,000.1

After taking out a title loan, you still have full access to your vehicle, and you’re allowed to use it as normal during the loan term. However, if you’re unable to repay the loan plus the interest and additional fees on the due date, the lender is able to take your vehicle and sell it to make back the money you owe. Many borrowers find themselves in this situation due to the extremely high interest and fees, and the short amount of time to repay.

How much do Title Loans cost?

Interest for title loans is usually about 25 percent for a 30-day loan, which makes the annual percentage rate or APR around 300 percent. This means that if you borrow $1,000, you’ll be required to pay back $1,250 or more depending on additional fees. Since you’ll probably only have about 30 days to repay the loan, this can be a daunting task, and can potentially result in the repossession of your vehicle.

Depending on the lender, you may have a few options for making your title loan payment. They might allow you to pay online, in person, or through an automatic payment function that would pull the funds from your bank account. However, lenders are not allowed to use the automatic payment option unless you have explicitly agreed to it beforehand. Once you’ve repaid the loan in full, the lender will then return your clear title.2

What are the benefits of Title Loans ?

The only clear benefit of an auto title loan is that you can get a quick cash loan, which will likely be larger than other fast-cash options like a payday loan. This is because the loan is secured by collateral. At the same time, this could also be seen as a risk, because you’ll have much more to pay back in a short amount of time. Even if you do pay back the loan, you’re paying much more than what you initially borrowed.

What are the risks of Title Loans?

The biggest risk when taking out an auto title loan is losing your vehicle. Along with losing your transportation to work, school, etc., you also lose the money that your vehicle is worth. In certain states, title lenders are required to pay you the difference when they sell your vehicle to recoup their losses. However, this isn’t always the case and, in some states, lenders can keep all the money associated with selling the vehicle.

The reason title loans are so expensive is because of their high interest and fees. Some common fees that title lenders charge include:

    Finance charge

    Processing fees

    Document fees

    Late fees

    Loan origination fees

    Title charges

    Lien fees

This is why it’s extremely important to review the terms of the loan before agreeing to anything. Make sure the lender discloses all fees, as well as the APR for the loan. The APR will be different than the monthly interest, and lenders are required to disclose this information.

What happens if I can’t repay a Title Loan?

Certain lenders may offer to extend your loan if you can’t repay. This is called “rollover”, and it’s a common tactic for predatory lenders like title and payday lenders. Rollover essentially means adding additional fees and interest to what you already owe in exchange for a little extra time to repay it.

Many people end up only paying the interest at the end of their loan term, meaning the entire amount they initially borrowed still needs to be repaid. And since the loan is being rolled over, you’ll have another 30 days to repay it, in addition to whatever fees and interest the lender will be charging you for the additional time.

Bottom Line

There’s no denying that title loans are extremely expensive and very risky. If you need your vehicle for any reason, taking out a title loan is not advised. If you’re already struggling with a costly title loan, reach out to a credit counselor for guidance.

References:

  1. “Car-Title Loan Regulation.” Consumer Federation of America. Accessed on October 4, 2016, at http://www.consumerfed.org/pdfs/Resources.CTL.StateLawTermChart12.2.12.pdf
  2. “Auto Title Loans: Market Practices and Borrowers’ Experiences.” Pew Charitable Trust. March 2015. Accessed on October 5, 2016, at http://www.pewtrusts.org/en/research-and-analysis/reports/2015/03/auto-title-loans