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Title Loan

By Julia Kagan

Updated January 15, 2021

Reviewed by Thomas Brock

What is a title loan?

A title loan is an loan that needs an asset to serve as collateral. Title loans are very popular due to two main reasons. The first is that an applicant’s credit rating is not taken into account when determining eligibility in order to get the loan. And second, thanks to the looser requirements for applications that a title loan is able to be approved quickly for amounts as low as $100.

Important Takeaways

A loan that needs an asset as collateral is known as a title loan.

Title loans are very popular since they do not look at the credit score of the applicant, and also because they can be approved quickly.

The most well-known kind of title loan is a car title loan that is where the car itself is the asset put on the line as collateral.

Title loans are usually taken on by those who require cash quickly or in financial difficulty.

The prices for title loans are exorbitant and they are considered to be a risky alternative to financing.

How does a Title Loan Work

The most commonly used kind of title loan is the vehicle title loan. In this scenario the potential borrower is required to own a car completely and hand it over to an automobile loan firm. The loan company can lend as much as 25% of car’s worth to the person who is borrowing and retain the title of the car as collateral in the event in the event of default.

The typical car title loan amounts are $1,000 however they could be more. The standard duration of loan is 15 to 30 days but can be longer. The borrower can pay back the title loan with a single payment generally after one month, or repay the loan through a multi-year installment plan. If a borrower does not pay off the title loan according to the repayment agreement the vehicle can be taken away immediately by the auto loan title company. The loan company may also consider the borrower who is in default to make interest-only payments over one month periods which effectively roll over the loan amount indefinitely until the loan is repaid.

Special Considerations

Title loans could be appealing to individuals with bad credit or with financial difficulties who require quick cash. But, there are high costs associated with title loans, especially car title loans, that should make borrowers think twice before taking them.

The annual percentage rate (APR) on the average car title loan can be up to 300% and is almost always greater than the 100% rate. The APR’s high rate can lead to a financial treadmill where borrowers are unable to catch up or pay down the loan’s principal. This is why the auto title or car title lenders are sometimes called «predatory lenders» because they are known to target people in need of cash in emergency situations.

An example of a title loan

Consider, for instance, a 500 car title loan which is due to be paid back within a one month period. The loan has An APR of%. This amounts to 20 percent. In these terms the borrower is required to pay the title loan company $600 interest and principal to pay back the loan. If you need to pay urgently to pay $500 to pay it off, paying an additional $100 in interest over a one-month period may create financial hardships.

Consider a $5,000 car title loan which must be repaid in 24 monthly installments with an APR of 108%. In this scenario an unpaid 24-month title loan that has monthly compounding, will cost the borrower $7,362.71 in interest on top of the initial $5,000 principalamount, with a total payment of $12,362.71. That’s not even including costs.

Other options to title loans

Though the title loans can be a tempting option when going through financial difficulties, they often place a person in a worse financial situation than they were in before because of the charges and high rates of interest. The world of finance is vast and there are many better alternatives to the title loans.

Some other options include credit cards, even though they have high interest rates, they are not as costly as the rates for title loans. Before taking on more debt However, a person may renegotiate current credit with their credit card or bank companies. It is also possible to seek an extension of the amount of their debts with their creditors, and they might be willing to comply in the short term. A personal loan is superior to secured loan where one has to put up collateral. While unsecured loans are more expensive in terms of interest when compared to secured loans because of the higher risk to the lender personal loans have lower rates than title loans.

When considering an unsecured loan It’s worth using an online financial calculator for personal use to understand the way an interest rate could affect the total interest paid by the end of the loan.

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