Car title loans are short-term secured loans that use the borrower’s car as a collateral.
In the event of non-payment of the loan, the lender has the right to take ownership of the car.
Still, this loan type features flexible approval criteria, enabling prospective borrowers to access quick approvals for amounts starting as low as $100.
The most popular title loan is a car title loan. For this form of financing, a borrower is required to own a car and sign the vehicle’s title over to the lender or the auto loan title company.
About 25% of the car’s total value is provided to the borrower and the auto loan company keeps the car’s title as collateral in case of any default.
The repayment terms are usually between 15-30 days, but can be extended depending on the borrower’s financing requirements.
The borrower can repay the car loan with a single payment after one month or they can even repay the loan on a multi-year installment plan.
If the borrower fails to repay the loan, the car can be seized by the auto loan title company.
The auto loan title company may also present an option to make interest-only payments for one month, with the remainder of the loan amount to be rolled over until it is repaid.
These loans are beneficial for individuals with low credit ratings or for people who need quick cash. However, there are additional costs attached to these loans.
On an average car title loan, the APR (Annual Percentage Rate) can go as high as 300% and is usually higher than 100%.
Because of this high APR, borrowers are often unable to catch up and many end up in a cyclical debt-trap.
Auto title companies are also often described as predatory lenders given they tend to focus on needy individuals who desperately need financial help during emergencies.
Imagine you take out a $500 car title loan which needs to be repaid within 30 days. The APR offered to you is 240%.
This means the monthly rate of interest is 20%. So, for a $500 loan, you will pay $100 interest within 30 days.
This can be challenging for borrowers already facing limited access to funds, and often causes excessive financial hardship.
Now, let’s say you take out a $5,000 loan to be repaid in 24 months at an APR of 108%.
By the end of the term, you’ll be paying almost $3,379 as interest in addition to the principal amount of $5,000. As you can see, this is an enormous amount that leaves your pocket.
Add in the fees and other charges and you’ll likely end up paying twice the amount you initially borrowed.
Though car title loans can be tempting if you are experiencing financial difficulties, they can spark an inescapable debt cycle when not used responsibly due to high interest rates and fees.
It is always a good idea to explore other options like a credit card or secured personal loan before applying for a title loan.
