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Title Loan
By Julia Kagan
Updated January 15, 2021
Review by Thomas Brock
What Is a Title Loan?
The term «title» refers to a loan is an loan that requires an asset as collateral. Title loans are popular for two main reasons. The first is that an applicant’s credit score isn’t considered in determining the eligibility in order to get the loan. In addition, due to less stringent requirements for application that a title loan is able to be approved quickly for sums as little as $100.
Important Takeaways
A loan that needs an asset to be used as collateral is referred to as an asset loan.
Title loans are well-known because they do not consider an applicant’s credit rating and also because they can be approved quickly.
The most popular kind that is a title loan is a car title loan in which the vehicle is the asset that is put to use as collateral.
Title loans are usually taken on by people who need cash urgently or who are in financial trouble.
The costs associated with title loans are high and are considered to be a poor financing option.
How does a Title Loan Work
The most common kind of title loan is one that is a car title loan. In this scenario the potential borrower is required to own a car outright and sign that the car title is transferred to an auto loan title company. The loan company can lend at least 25% of vehicle’s worth to the person who is borrowing and retain the title of the car as collateral in the event of default.
Typical car title loan amount is $1,000 however they could be more. The typical duration for the loan is 15-30 days but can be longer. Borrowers can repay the car title loan by making a single payment, typically after one month, or pay back the loan through a multi-year installment plan. If the borrower fails to pay off the title loan according to the repayment agreement, the car can be confiscated by the auto loan Title company. The loan company can also choose to permitting a person who is in default pay interest-only for one-month periods which effectively roll over the loan amount for a period of time until it’s repaid.
Special Beacons
Title loans could be appealing to individuals with bad credit or those with financial difficulties who require urgent cash. However, there are hefty costs related to title loans and, in particular, the car title loans that ought to make borrowers think twice before taking them.
The annual percentage rate (APR) for the average car title loan can be up to 300% and is almost always higher than the 100% rate. The APR’s high rate can lead to the borrower to be on a financial treadmill and are unable to catch up or pay down the loan’s principal. Because of this, the auto title or car title lenders are often called «predatory lenders» because they are known to prey on people who need money in urgent situations.
A good example of a Title Loan
For instance the $500 title car loan that must be paid back in a single month period. The loan has An APR of%. That comes out to an annual rate of 20%. Under this arrangement the borrower has to pay the car title loan company $600 principal and interest in order to repay the loan. If someone needs cash fast to pay it off, paying an additional $100 of interest in one month could create financial hardships.
Or consider a $5,000 car title loan that must be repaid in installments of 24 months and has an annual percentage rate (APR) of 108 percent. In this instance the 24-month car title loan with monthly compounding, would cost the borrower $7,362.71 in interest in addition to the initial $5,000 principal, to a total amount of $12,362.71. This doesn’t even include costs.
Other options to title loans
While titles loans can be a tempting option when going through financial difficulties, they often leave a person in worse financial situation than they were in before because of the high interest rates and fees. The world of finance is wide and there are a variety of better alternatives to title loans.
Some other options include credit cards. Although they carry high interest rates but they’re not as costly as the rates for title loans. Before taking on further debt, however, an individual could renegotiate the terms of their existing debt with their credit card or bank businesses. They can also often request an extension of their debts from their creditors and may be willing to accept in the short-term. The option of taking out an unsecure personal loan is superior to secured loan which requires one to put up collateral. Though loans that are unsecured loans have higher interest rates when compared to secured loans due to the greater risk to the lender personal loans provide better rates than title loans.
When you’re thinking about an unsecured loan It’s worth using an individual financial calculator to see just the way an interest rate could affect the total interest due at the conclusion term of loan.
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