Car title loans: What they are and how they work Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our goal is to help you make better financial decisions by providing you with interactive tools and financial calculators that provide objective and original content, by enabling you to conduct your own research and compare data for free – so that you can make informed financial decisions. Bankrate has agreements with issuers such as, but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The deals that are displayed on this site come from companies that pay us. This compensation may impact how and where products appear on this site, including, for example, the order in which they be listed within the categories of listing and other categories, unless prohibited by law. This applies to our mortgage, home equity and other home lending products. This compensation, however, does not influence the information we publish, or the reviews that you read on this site. We do not cover the entire universe of businesses or financial offerings that could be available to you. Barry Winiker/Getty Images
5 minutes read. published on October 19, 2022.
Writer: David McMillin Written by Contributing writer David McMillin is a contributing writer for Bankrate and writes about topics such as mortgages, credit cards and credit cards banking, taxes, and travel. David’s goal is to help readers discover ways to save money and also stress less.
Edited by Rhys Subitch The edit was done by Auto loans editor Rhys has been writing and editing for Bankrate since the end of 2021. They are passionate about helping readers gain confidence to take control of their finances with precise, well-studied information that breaks down otherwise complex subjects into digestible pieces. The Bankrate promises
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We are compensated in exchange for the placement of sponsored products and services, or by you clicking on specific links on our site. So, this compensation can influence the manner, place and in what order items are listed and categories, unless it is prohibited by law. This is the case for our loan products, such as mortgages and home equity, and other home loan products. Other factors, like our own website rules and whether or not a product is available in your region or within your own personal credit score could also affect the way and place products are listed on this site. Although we try to offer a wide range offers, Bankrate does not include specific information on every credit or financial products or services. All loans come with risks in the event that they’re not paid promptly. However, a car title loan has a particularly threatening outcome if you fail meet your payment obligations the lender can take your vehicle. Before you consider getting an auto title loan it’s important to understand the potential disadvantages of using your car as collateral for borrowing money. What are car title loans? The car title loan, or “pink slip loan,” allows you to get a loan of anywhere between 25 percent to 50 percent of the worth of your vehicle in exchange for giving your lender you the title for your car as collateral. These short-term loans generally start at $100 with repayment periods of 15 to 30 days. Title car loans are designed for those with credit issues in the past who need cash quickly. Many lenders have minimal to no credit requirements -Some won’t even . The process of applying for a loan is generally simple, and if approved, you can expect to receive funding as soon as 24 hours later, often, even earlier. The ease of access implies that these loan products have high rates of interest. Some states limit how much interest lenders can charge but others do not have any restrictions. And in some states, lenders are not permitted to offer car title loans to customers. If you reside in the state that allows automobile title loans are permitted, you typically need to obtain an loan. Some lenders will offer these loans when your car is almost paid off, however it isn’t as prevalent. How do titles loans work? Car title loans come in a couple of varieties. There are loans that are one-payment loans, meaning the borrower must pay the full value of the loan plus the interest rate fee within a month , or so. The loan is repaid over the course of three or six months, based upon the lender. Although the word “car” might be part of the title of the product but these loans also can be offered for boats, motorcycles and other recreational vehicles. You can apply either online or in person but you’ll need to visit an actual location to present your car in front of the lender. Be sure to provide the lender with a clear title, and a photo ID , when applying for a title car loan. The lender might also require keys. The vehicle will remain in your possession during the repayment period until you fail to pay the loan. To demonstrate how these loans operate, let’s say you own a vehicle worth $5,000 and you are in a situation of emergency and need $1,000. A title loan lets you use your vehicle as collateral so you can get the $1,000 quickly. Similar to a mortgage that makes use of your house as collateral while a title loan utilizes your car as collateral. In order to get the title of your car back the loan is to be paid in entirety, not including the high fees the lender charges for providing the money. The fees usually include an average monthly finance fee of 25 percent. This amounts to an annual percentage rate at 300 percent. For a $1,000 loan that you take out, you’ll be charged the additional amount of $250 for interest even if the loan is repaid in just 30 days. If you’re not on time with your payment and late penalty charges are determined and imposed, your loan could cost you a small fortune. Some lenders will also charge origination, processing and document fees, driving the cost of borrowing more. It is also possible that you will be required to purchase and pay for a roadside service plan for your vehicle. Downsides to title loans While the process of getting a title loan may be easy, the convenience comes with significant costs and risk as per Graciela Aponte-Diaz, director for federal campaigns at the Center for Responsible Lending. “If you can’t pay back the loan in time it’s carried over into another cycle that has more fees,” says Bruce McClary, senior vice president of communication at the National Foundation for Credit Counseling. “It results in a very stressful situation for those who are already struggling to pay. It’s the most precise definition of the debt cycle.” The main drawback to this is the possibility of losing your car. If you’re unable to pay back the loan, the lender may take your car and then sell it to get the money. And this isn’t all that common. A study conducted by the revealed that 20% of people who take out title loans are able to seize their cars. Even worse, “some car title lenders install the GPS device — nicknamed”kill switch”- that can prevent the car of the borrower from starting by using this method as a means of collecting the debt or making it more easy to seize the car,” Aponte-Diaz adds. Because of the risk of losing your main means to travel, it’s not difficult to understand how an auto title loan could be a stressful experience. Solutions to the title loans With all the serious disadvantages, McClary recommends reaching out to traditional banks and credit unions to find less expensive loan options. Or you can make use of a credit card if you have one available for your immediate cash needs. Even if you don’t have an account with a bank account, have a lower credit score or have been a victim of poor financial decisions before, it’s worthwhile to look into all your alternatives. “It’s interesting how flexible these traditional lenders can be,” McClary says. “There are many credit unions open to working with bankless customers.” Apply for personal loan Even though getting an individual loan isn’t easy if you have bad credit, you may have alternatives. There are online lenders that you may be qualified to apply for. If you’re a member of a credit cooperative You can also try telling your story to the banker. They might approve you for a loan based on the strength of your relationship and good credit history. You can also solicit a family member or friend with a stable source of income and strong credit score to join you as a , strengthening your chances of approval. Consider a payday alternative loan Payday alternative loans are another less costly option to look into. They’re available through some credit unions, however you must be a member in order to get access to this loan product. The loan amounts vary between $200 and $2,000 payable over one to 12 months. The application fee is capped at $20 and you’ll not pay more than 28 percent of interest. This makes payday alternative loans more affordable than car title loans and some bad credit personal loans. Utilize a credit card could also make use of a credit card if you have a dire financial need. You can also take money from your credit card via an . Be aware that the rate of interest for cash advances can be much more than what you pay for purchases — anywhere from a to 30 percent variable. Additionally, there is no grace period. Interest will start accruing right away. Be prepared that you’ll have to cover an ATM fee to withdraw your funds. McClary rarely advises adding to credit card debt, but she says it’s a better option than an auto title loan because you’re likely to pay less interest than you would with a car title loan. The bottom line: Car title loans are an excellent option for getting fast cash. However, the cost is generally too high for the risks and you may be in a worse position than you were before taking your loan. Consider more affordable alternatives, like a credit card or private loan or payday alternative loan, before settling on a title car loan. However, if you’ve exhausted all your alternatives and you have to take the car title loan, be sure to read the fine print. Title lenders have to provide you with loan conditions in writing prior to signing, and federal law requires that they be honest and upfront regarding the total price for the loan.
Written by a contributing writer David McMillin is a contributing writer for Bankrate and writes about topics such as credit cards, mortgages, banking, taxes and travel. David’s goal is to help readers understand how to save more and stress less.
Written by Rhys Subitch Edited by Auto loans Editor Rhys has been editing and writing for Bankrate from late 2021. They are enthusiastic about helping readers gain the confidence to control their finances with precise, well-researched and well-documented facts that break down complicated subjects into bite-sized pieces.
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