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Title Loan
By Julia Kagan
Updated January 15, 2021
Reviewed by Thomas Brock
What is a title loan?
An entrepreneur’s title loan is a loan that requires an asset as collateral. Title loans are very popular due to two primary reasons. The first is that an applicant’s credit score isn’t taken into account when determining eligibility in order to get the loan. In addition, due to less stringent requirements for application, a title loan can be approved very quickly for sums as little as $100.
Important Takeaways
A loan that requires an asset as collateral is known as a title loan.
Title loans are popular because they do not take into consideration an applicant’s credit rating and they are approved quickly.
The most well-known kind of title loan is the car title loan that is where the car is the asset that is put on the line as collateral.
Title loans are typically taken by those who require cash quickly or in financial difficulty.
The costs of title loans are exorbitant and they are considered to be a risky alternative to financing.
How a Title Loan Works
The most popular type of title loan is the car title loan. In this case, a potential borrower is required to own a car in full and then sign it over to an automobile loan title company. The loan company can lend as much as 25% of vehicle’s total value to the borrower, and keep the car’s title as collateral in case of default.
The typical car title loan amounts are $1000, although they can be greater. The standard length of the loan is 15 to 30 days but can be longer. Borrowers can repay the car title loan by making a single payment usually after a month, or repay the loan through a multi-year installment plan. If a borrower doesn’t pay back the title loan according to the repayment agreement the vehicle can be taken away immediately from the loan title company. The loan company can also choose to permitting a person who is in default pay interest-only for one month periods that effectively extend the loan amount indefinitely until the loan is paid.
Special Considerations
Title loans might sound appealing for those with poor credit or those with financial difficulties who require cash fast. However, there are exorbitant costs related to title loans particularly the car title loans, that should give borrowers pause.
Annual percentage rates (APR) on the average car title loan could be as high as 300% and is almost always higher than the 100% interest. The high APR can cause an economic treadmill that borrowers are unable to catch up or make the loan’s principal payment. For this reason, auto title or car title lenders are often called «predatory lenders» because they are known to target people in need of money in urgent situations.
Example of a Title Loan
For instance an example of a $500 car title loan that must be paid back within a one month period. It has an APR of 240%. This amounts to 20 percent. In this arrangement the borrower has to pay the car title loan company $600 principal and interest in order to repay the debt. If you need to pay cash fast, paying an additional $100 in interest within a one-month period may result in financial difficulties.
You could also consider a car title loan that must be repaid in 24 monthly installments and has an annual percentage rate (APR) of 108%. In this instance an unpaid 24-month title loan, with monthly compounding, would cost the applicant $7,362.71 in interest costs in addition to the initial principal of $5,000, to a total amount of $12,362.71. This doesn’t even include charges.
Other options to title loans
While title loans could be an appealing choice when facing difficult times, they can place a person in a more difficult financial position than they were prior to because of the excessive interest rates and charges. The financial world is broad and there are many better alternatives to the title loans.
Other options include credit cards. Although they carry high interest rates but they’re not as costly as the rates that are used for titles loans. Before taking on further debt However, a person can renegotiate their current credit with their bank or credit card companies. It is also possible to ask for an extension on the amount of their debts with their creditors, and they might be willing to comply in the short-term. The option of taking out an unsecure personal loan is preferential to a secured loan where one has to put up collateral. Although unsecured loans are more expensive in terms of interest when compared to secured loans because of the higher risk to the lender personal loans offer better rates than those offered for title loans.
When considering an unsecured loan, it’s worth using an online financial calculator for personal use to determine the way an interest rate could impact the amount of interest that is paid by the end of the loan.
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