How Do Title Loans Work?
Title loans are designed to provide fast cash to any vehicle owner, regardless of credit score. That’s because your vehicle - car, truck or motorcycle - serves as collateral for your loan. A title loan may come in handy when you need money quickly and have few other options. Read on to learn about the costs and risks of title loans.
What Is a Title Loan?
A title loan is a short-term loan secured by the current value of your vehicle minus any current outstanding vehicle loans. Typically, title loans have no credit score requirements. The amount you can get varies by location and can range from $1,000 to $10,000 and higher. In return, you’ll have to pay an expensive interest rate and fees. Many states forbid title loans. However, if you live in any of the following states, you can get a title loan:
How Title Loans Operate
You can apply for a title at a brick-and-mortar title store or online. Typically, you’ll be able to extract up to 50% of your equity in the vehicle, based on its current value and any money you owe on it. Frequently must have full and unencumbered title to the vehicle, meaning there can’t be any financing on the vehicle. However, some title loan providers approve loans even if you are currently financing your vehicle.
To secure a title loan, you’ll need to:
Fill out the application form.
Bring your vehicle to a specified title loan location for inspection.
Bring in your vehicle’s title document.
Show proof of insurance on the vehicle.
Provide a photo id of yourself.
Bring an extra set of keys.
In most states that permit title loans, a credit check is not required. Nor do title loan providers need to check your income, meaning they have no idea whether you can afford to repay the loan. If approved, you sign a loan agreement that specifies the loan amount, the loan period (typically 15 to 30 days), the interest rate and any fees that apply. Sometimes, the lender will install a GPS device in your vehicle to facilitate repossession if necessary. The lender will take possession of the vehicle’s title and hand you cash or a check. Of course, you can continue to drive your vehicle during the loan period. The lender will keep hold of your title until you fully repay the loan.
You may make your loan payments either in person at the loan store or through an authorized withdrawal from your checking account. Failure to make timely payments can result in the lender repossessing your vehicle. The lender can then sell the vehicle and use the proceeds to repay the loan. In most states, you receive any money left over after paying all fees and expenses. However, some states allow title loan providers to keep all the money resulting from the vehicle sale.
Cost of Title Loans
Title loans are expensive. If you take one out, know that repayment might add to your financial difficulties. Costs can be sky-high, with typical charges of 25% per month. That’s an annual percentage rate (APR) of 300%. For example, a 30-day, $600 title loan might cost you the following:
A one-time finance charge of $150.
An interest rate of 10%. That’s $60 if you repay at the end of the loan period.
A title certification fee of $35.
That adds up to a $245 cost, equal to an APR of 490%. That’s a punitively high cost, especially for someone already experiencing a financial hardship. If you’ve trouble making the payments, you risk loss of your vehicle. You may be able to roll over your debt for another period, but you’ll have to pay special fees on top of the normal ones. This can trap you in a debt spiral that could eventually result in the forfeiture of your vehicle.
Some banks and credit unions offer title loans that cost less or feature longer payback periods than those offered by title loan companies.
How Title Loans Affect Your Credit
Because title loan companies in most states do not have to check your credit, a title loan that you repay on time might have no effect on your credit score. In some states, the loan provider will perform a hard inquiry on your credit report that’ll shave up to five points off your score. Since the title loan company likely won’t report your timely payments to the credit bureaus, your credit score will receive no boost.
Your credit score may go unscathed even if the lender is forced to repossess your vehicle. That’s because sale of the vehicle will repay the loan, with no need to involve a collection agency and no need to report the transaction to the credit agency. Nevertheless, you can expect a negative score impact if your lender does report the default to the credit bureaus.
Title Loan Alternatives
In addition to high costs, you risk losing your vehicle if you default on your title loan. That can have disastrous side-effects, such as not being able to commute to your job. Therefore, it pays to check out alternatives to title loans:
Personal loan: if you have decent credit,-you might be able to get a personal loan from a bank, credit union, or online loan provider. You don’t have to put up collateral for a personal loan and it usually costs much less than a title loan
Credit card advances: these are usually expensive, but not nearly as costly as title loans. Furthermore, you don’t risk losing your vehicle
Home equity line of credit (HELOC): if you own a home, a HELOC can be a cheap source of money. However, if you default on a HELOC, the lender can foreclose on your home
Extra income: rather than take on debt, consider ways to improve your cash income, such as taking on gigs at home in your spare hours. Also, consider ways to economize. For example, if your current vehicle is expensive to own, you can trade it in for a less expensive one and use any cash left over to help with your financial situation.