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Car Title Loans Explained

last updated August 16, 2018

Do you save money for the proverbial rainy day? When an unexpected illness or theft occurs, people respond in two ways:

  1. Those who save regularly will withdraw enough money from their bank accounts to solve their problems and move on with life.
  2. People who don’t have savings end up borrowing. That’s why auto title loans are always in high demand.

car title loans

1. What is a car title loan?

It’s a loan that you receive within a couple of hours in exchange for your motor vehicle’s title. The creditor retains your car’s title until you pay the final installment. While this form of credit is legit, it heavily favors creditors due to three reasons.

  1. Did you know that the average APR for vehicle title loans ranges from 259-300%? If you borrow a loan for a car title worth $2,000, your creditor expects you to repay $2,431 after 30 days. If you break down this amount, you’ll realize that your loan accrues an interest of $107 every week! However, if a borrower chooses a longer repayment period, the credit lender imposes a 300% APR.
  2. Credit lenders offering loans for car titles can only offer loans up to 40% of the borrower’s car value. In most cases, lenders do their own valuation. This policy provides opportunities for dishonest lenders to undervalue cars.
  3. Auto title loans have very short repayment periods similar to payday loans. The longest repayment period you can receive is six months. If you consider how high the APR is, then this repayment period puts borrowers under high financial pressure.

Learn More: Getting Bankruptcy Car Loans

2. What are the types of motor vehicle title loans?

auto title loans explained in detail

Single payment

When you borrow this loan, your creditor expects you to repay it in one lump sum. If you went online and typed “car title loans near me” then went and borrowed $2,000, your creditor expects $2,431 after 30 days. Single payment title loans have a strict repayment period of 30 days.

Some people believe this is an ideal option for quick cash because creditors provide the money within a couple of hours. Plus, the onetime repayment enables you to get out of debt fast. However, if your paycheck delays beyond the repayment date, you’ll probably need to borrow a different loan or sell an important business asset or household item to pay your creditor.

Installment Loan

You’ll come across credit lenders offering installment car title loans with different repayment periods. Just as the name suggests, a creditor allows you to repay your title loan within three to six months. However, you’ll pay a higher interest rate.

If you need more than $5,000 dollars urgently, then borrowing an installment auto title loan is better than a single payment one.

While it’s possible to repay it in one lump sum, your remaining net income might be too little to meet other important recurring needs. That’s why an installment loan is better because it ensures you have sufficient net income to pay your utilities.

Learn More: Second Chance Car Loans

3. Can I renew a car title loan?

Yes, you can. However, this only applies to installment loans. Borrowers who find themselves unable to pay the same installment tend to renew their auto title loans by applying for a longer repayment period. Stretching the outstanding balance over a longer duration reduces your monthly installment to a manageable level.

Is renewing a car loan a smart move? No, it isn’t because you gain short-term financial relief but end up making the creditor richer. Extending your repayment period also increases the amount of interest you pay. You’ll notice that renewing your title loan makes you pay 30% higher than your initial agreement.

4. Is it safe to borrow car title loans online?

Perhaps you found three or four websites after searching vehicle title loans near me. However, you’re not sure whether to submit your personal information or wait until you find a credit lender with an actual office.

Before providing your details, you need to verify the identity of the online-based credit lender. You can use ScamAdviser or WhoIS to find out the real owners and their location. Check their Facebook and Twitter accounts to see whether their posts elicit any responses from potential and converted customers.

Make sure you visit consumer reviews websites such as the Better Business Bureau and Glassdoor to find out what past customers have experienced with the particular online lender.

You need to know whether the creditor imposes hidden charges since it’s common with most title loans. Engaging with previous customers on these customer reviews websites will also help you to know how long the lender takes to respond to customers’ questions.

If you still can’t find sufficient information about the online lender, just visit a registered lender with a physical address because you’ll stop by and ask questions. Otherwise, you may submit your personal and financial information to identity thieves.

Learn More: 9 Things to Know Before Buying a Used Car

5. What are the requirements?

  • Proof of identity
  • Proof of income
  • Proof of car ownership

easy to borrow money against my car title

Proof of identity

Credit lenders require borrowers to present photocopies of their driving licenses for identity verification. This is to make sure that they’re not dealing with identity thieves or minors. You’ll also provide your SSN number and copies of previous tax returns as well. If you’re a foreigner, make sure you carry your alien registration number and passport.

Proof of income

You’ll provide copies of your paycheck for the creditor to determine your financial ability. Creditors also ask for your bank statements to calculate your debt-to-income ratio. Someone who earns $5,000 per month but spends $3,000 will qualify for a $2,000 title loan because their net income is small.

Proof of car ownership

It’s illegal to borrow a title loan using a car that’s still under an auto loan. Why? Because it belongs to the bank or car dealership until you clear the auto loan. Motor vehicle title loan lenders require original car titles to ensure that if the borrower defaults, no conflict will arise from third parties when the lender takes the car.

6. Avoid these mistakes when seeking a motor vehicle title loan

  • Borrowing more than necessary
  • Refusing to use a loan calculator
  • Agreeing to the first offer you come across
  • Signing the agreement without reading it
  • Skipping payments without informing your credit lender

car loan title buying mistakes

1. Borrowing more than necessary

Quick cash is appealing especially when one is dealing with emergencies. Some people assume that they’ll hold on to the excess amount and use it to repay the title loan. However, this rarely happens. The higher your principle, the more interest you pay. Overborrowing can push you further into debt due to the high APR attached to your loan.

2. Refusing to use a loan calculator

There are several websites offering free loan calculators to enable borrowers to compare loans from various credit lenders. A loan calculator also helps you to verify whether the monthly installments printed in your repayment plan are correct. Some credit lenders know that a few borrowers don’t bother to verify the numbers and this creates an opportunity to inflate monthly installments.

3. Agreeing to the first offer you come across

Since title loans are legal, it means that several credit lenders are ready to do business with you. No matter your emergency, you definitely need to compare loans offered by your local creditors. Why? Because some creditors offer more affordable interest rates than others do. Some do a better car valuation in order for customers to get value for money.

Learn More: Getting Approved: Student Car Loans With No Credit

4. Signing the agreement without reading it

Some borrowers don’t see the need of reading loan agreements as long as they know the interest rate and repayment period. However, there’s more to a title loan than just those two factors. Reading the agreement carefully enlightens you on whether the title loan will affect your credit score if you skip payments. You’ll also know whether your creditor will charge repossession fees in case you can’t keep up with installments.

5. Skipping payments without informing your credit lender

One setback about auto title loans is some credit lenders will repossess a car after a debtor skips two consecutive monthly payments. In some states, creditors cannot roll over a debt consecutively and this is why they quickly resort to repossession. Approaching your creditor in advance to explain your financial situation can save you from paying late payment fines.

7. Why are loans for car titles risky?

  • Unusually short repayment periods
  • High probability of ruining your credit score
  • Can push you further into unwanted debt

title loans for automobile risks

1. Unusually short repayment periods

When you realize that you have to pay thousands of dollars within three months or lose your car, it’s easy to suffer from stress. Most borrowers have to spend 40-50% of their monthly income on title loan installments during their repayment periods.

When you spend 50% of your net income on a loan, it becomes difficult to save for other important needs. For instance, saving up a down payment for a better home. You also can’t maintain an emergency account when most of your net income is servicing a costly auto title loan.

2. High probability of ruining your credit score

In most cases, repaying a car title loan on time doesn’t improve your credit score. That’s why creditors don’t check credit scores when borrowers apply for this type of loans. However, credit lenders have the right to report skipped payments to official credit reference bureaus. That makes it easy for borrowers to lose their original credit score just because they skipped two monthly payments.

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3. Can push you further into unwanted debt

Most people who’ve ever borrowed motor vehicle title loans had to borrow emergency loans in order to meet monthly needs while repaying installments. Due to the high APRs, most people have to spend almost half of their monthly income on one debt. So, in order to keep the lights on and fridge stocked with food, some borrowers resort to payday loans.

In this situation, the borrower will find himself or herself using a large portion of their monthly net income repaying several emergency loans. With so many loans to pay, it’s easy for one to fall behind on payments and mess their credit score.

8. Are there alternatives to title loans?

  • Save 25% of your monthly income regularly
  • Maintain a valid health insurance plan
  • Request for a salary advance
  • Borrow a credit union emergency loan

1. Save 25% of your monthly income regularly

Saving money means denying yourself a few wants today so you can have enough money for tomorrow’s needs. It will cost you nothing to open a fixed savings account. Plus, you earn a small interest when you save consistently for more than six months. Saving also enables you to maintain your current credit score because you won’t need to visit any credit lender to sort out an emergency.

2. Maintain a valid health insurance plan

Medical bills and medication appear in the top three reasons why people borrow auto title loans. However, you can avoid such situations by getting an affordable health insurance plan for you and your family. When a sudden illness or injury occurs, you won’t have to worry about borrowing because your health insurance provider already has you covered.

Also, ensure that you pay your health insurance premiums on time. This ensures that your insurance remains valid throughout because you never know when an emergency will occur.

3. Request for a salary advance

If you don’t want to spend 40-50% of your income repaying a costly short-term loan, play it safe by requesting a salary advance. It’s better than a title loan because you don’t put your credit score at risk plus there are hardly any requirements. Perhaps the only set back is that you might have to wait for a week to receive the cash.

4. Borrow a credit union emergency loan

Credit unions usually offer emergency loans known as Payday Alternative Loans (PAL). There are a few major advantages of this form of credit. You don’t have to deposit any collateral asset because the credit union holds on to your savings. Credit unions charge interest rates below 5 %.This is definitely a huge bargain compared to the 250-300% APRs attached to auto title loans.

9. Are car title loans worth it?

Based on what you’ve read in this post, it’s clear that you can take direct measures to prevent yourself from borrowing a motor vehicle title loan. Even though this type of loan will provide you with money for medication or other urgent needs within short notice, you’ll spend a lot of money to get out of debt.

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