How It Works
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.
Car Title Loan APR
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.
Pros Of Car Title Loans
- Instant Cash - If you have a car, there is nothing else you need. Just get in touch with an auto title loan company, receive the loan, and fulfill your financing needs.
- Quicker Approvals - Car title loans do not require lengthy application periods. To get started you just need your car title documents. After approval, the cash can be in your pocket in less than an hour.
- Doesn’t Need A Vehicle Requisition - If you opt for an auto title loan, the lender does not withhold your car immediately. Your car’s title, which signifies ownership, is just used as collateral to guarantee the loan.
- No Credit Score Requirement - This loan doesn’t have a minimum credit score requirement or any credit checks.
Cons Of Car Title Loans
- High APR - Car title loans are designed to be short-term loans. During this period, you will have to pay a large amount of interest. Usually, the APR starts at 100% and can run as high as 300% or more.
- Your Car Is At Risk - Though you can keep your car throughout the loan period, if you are not able to repay the loan within the set term, the car can be seized by the lender. Once the car is repossessed, the lender will sell it to recover the amount. In case any balance on the loan remains, you’ll still be liable to make the payment.
- Shorter Repayment Terms - Most title loans offer a repayment term ranging between 30 to 90 days. Coupled with the exorbitant rates, this short duration makes it extremely difficult to pay off the interest and the principal.
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.