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What is a title loan?
A title loan (car title loan) is a loan that requires clients to use their vehicle of choice as collateral. The organization that issues the loan takes hold of one’s vehicle title until the loan is repaid, and if it is not, the lender can repossess the vehicle. The car title loans are suitable for borrowing quick cash since they are short-term, high interest loans with little to no regard for credit rating and history.
Title loans are often criticised for being an unethical practice that exploits financially inept borrowers. However, it is also argued that high interest rates and other conditions are fair compensation for high risks for lenders.
What are the major types of title loans?
Title loans are secured loans, which means an asset must be used as collateral. In this case, assets are always vehicles, so loans are differentiated by the type of vehicle used as collateral.
A car title loan is the prevalent type of loan since cars are the most commonly used vehicle. Any personal auto can be used as collateral to secure car title loans.
Possible variations of a car title loan are loans, where borrowers can use trucks, SUVs, Motorcycles, RVs, or even boats as collateral.
How to apply for a car title loan?
The standard application procedure requires any potential borrower (over 18) to fill out a form (either online or offline).
Then, you will have to bring your car to the financial institution of choice for an expert inspection of the vehicle.
The lender will determine the amount of money you can borrow, and you can sign the papers.
What are the main requirements for obtaining a title loan?
The basic requirements for obtaining a title loan are the sole ownership of the vehicle, a lien-free car title, and a driver’s license (or other government-issued ID).
Lenders will also often (but not always) require other documents and information.
For instance, you will most definitely have to prove your ability to pay back the loan (by providing proof of income or recent pay stubs). Also, you may need to show proof of car insurance and proof of residency (such as a utility bill or another form of mail). The lender might ask for current vehicle registration and contact information for two valid references. In exceptional cases, lenders can ask for a working copy of your car keys.
Bad credit or unemployment won't usually influence this type of loan agreement significantly.
You must repay the secured loan during the agreed period, usually 30 days. You will have to repay the loan sum at the end of the period plus any interest, fees, and required add-ons (like a roadside service plan). Typically, lenders charge a monthly payment of 25% of the loan’s amount, but it varies across different states.
Ways to get a title loan
Importantly, car title loans work differently than other types of credit, and installment payments are not allowed. You will have to provide the money in one lump sum.
An asset backs up car title loans, and unlike unsecured loans, the maximum loan amount depends directly on the vehicle's estimated cost. The loan limit varies from 25% to 50% and can be acquired in partial payments (meaning you don't have to borrow the whole sum). Typically, short-term loans are measured in hundreds of dollars, not thousands.
Here are all possible ways to receive the title loan:
Direct deposit
If you create an application at a company's website, the loan amount will be deposited directly into your bank account the following business day after you sign the agreement. However, unlike personal loans, you cannot complete the process entirely online since you have to bring your car to a store for visual inspection.
In cash
Fast online applications are not the best options for those who need cash, and In-store loans are a better suit. If you do the deal in person, you can get the money in cash in hours.
With a check
It is the least popular way of getting loan money, but companies often have this option. You can learn the specifics on the website or find out at a location. Typically, the financial institution sends the check by postal mail, and you can either cash it or deposit it into your account.
How to repay a title loan debt?
How you repay the loan depends on applying for a loan (online or offline). Here are the most common ways to repay car title loans:
Automatic debits
You can repay your title loan via ACH, and many lenders offer discounts for automatic debits from your bank account.
Debit card
Most companies also offer a debit card payment option, and you can pay via customer service over the phone or online on the portal.
In cash or by card
If you signed the agreement at an offline location, you'd usually have to drive there to make the payment. Both cash and by-card options are available.
Money order
If you are an online customer, you can make payment through the company's customer portal by sending a money order for direct payment to the company's banking account.
With a check
If your lender isn't a big-scale company, you can repay your loan using a mailed check. A lender may accept a traditional check from you or ask you to write a post-dated check they can deposit on the day when the payment period ends.
If you cannot pay the loan back during the agreed period, the lender can offer to extend the loan for another month, but that will increase the number of fees due to the standard "late charge." According to Consumer Financial Protection Bureau, 1 in 5 extended title loans result in car repossession due to borrowers' inability to repay.
If you end up in this situation, you can try to borrow money from your friends or family, ask your employer for a paycheck advance, or seek help and support at a credit union.
Pros and cons of title loans
Before obtaining a title loan, consider its advantages and disadvantages.
Pros
Fast cash. If you come to the lender's office with your car, the application-inspection-approval process can take no more than a few hours, and you will have access to the many almost immediately.
Can keep the car. The title loan allows you to continue using your car while it serves as collateral.
No credit check. Most credit and loans eligibility criteria include good credit history and are unavailable to people with bad credit. Many car title loan lenders accept applications regardless of credit history.
Cons
High interest rates. Annual percentage rates for car title loans can be 300%. If you attempt to repay the loan after the extension, you can spend thrice as much as you borrowed.
Debt cycle. Applicants who have already struggled with money can constantly borrow and repay money as they try to pay off their previous debts. It is dangerous for the family economy and a person's well-being.
Short payment period. You get cash fast, but you have to repay it quickly.Traditional loans (e.g., personal loans) can have up to 60 months of repayment terms. A car title loan must typically be repaid in one month, which doesn't give clients enough time to get the required funding and again sends them into a debt trap.
Vehicle repossession. Personal automobile often serves as a source of income and is an irreplaceable commodity. Car title loans can result in losing such a valuable asset for the borrower. Consumer Financial Protection Bureau found that 20% of those who took out a car title loan end up without their vehicle.
Legal regulation of the title loans in the USA
According to the Consumer Federation of America (CFA), there are three categories of states based on the title loans regulation.
Legal
The following states do not prohibit using a vehicle to secure a loan: Alabama, Arizona, Delaware, Georgia, Idaho, Illinois, Mississippi, Missouri, Nevada, New Hampshire, New Mexico, South Dakota, Tennessee, Texas, Utah, Virginia, and Wisconsin. These states do not put any limitations on the cost of a title loan: Wisconsin, New Mexico, Illinois, Utah, Nevada, Idaho, South Dakota, Missouri, and Delaware.
Loophole
Four states do not have definite laws on title loans, so they are allowed under certain conditions. In South Carolina, the minimum loan amount must be 600$ because lower amount loans have interest rate limitations. The same scenario takes place in California. To avoid the small loan rate cap, lenders offer to borrow more than 2500$. Louisiana and Kansas have similar legal loopholes.
Illegal
Consequently, other states strictly ban car title loans due to their often fraudulent and exploitative nature.
The Military Lending Act
Note that active military service members are entitled to special legal protection when obtaining loans. Title loan lenders or other lenders cannot:
require access to their bank account
charge them with a prepayment penalty
make borrowers pay their loans by check
set APRs higher than 36%
ask them to create a voluntary military allotment to obtain the loan
Due to these limitations, lenders can refuse to give out car title loans to military servicemembers.
The real cost of a title loan
The actual cost of a title loan is significantly higher than that of a traditional loan due to higher risk rates. Monthly interest fees can be as high as 20-25%, with APR adding up to 300%. If a borrower takes a 2000$ car title loan with a 20% monthly finance charge, in 30 days, they will have to pay a total of 2400$. If they ask their lender to roll the loan over into a new loan, they will have to pay 400$ more for each month of extension and likely additional late payment charges.
The chances are high that the borrower will take out a personal loan or get a credit card cash advance to repay the previous debt and agree to increased fees and interest. The borrower will have spent 3-4 times the initial loan sum by the end of the repaying period.
Should I take a title loan?
We recommend resorting to title loans if you have considered all safer options (like credit union support or traditional loans) and didn't find anything suitable. Be conscious of all possible risks and try to avoid debt traps.