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Car title loans: What they are and how they work Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make better financial choices by offering you interactive tools and financial calculators as well as publishing unique and impartial content, by enabling users to conduct research and compare information for free — so that you can make informed financial decisions. Bankrate has agreements with issuers such as, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn money The products that appear on this site are from companies that pay us. This compensation may impact how and when products are featured on the site, such as for instance, the sequence in which they be displayed within the listing categories, except where prohibited by law. Our mortgage home equity, mortgage and other home lending products. However, this compensation will affect the content we publish or the reviews appear on this website. We do not cover the vast array of companies or financial offerings that could be available to you. Barry Winiker/Getty Images
5 min read Published October 19, 2022
Written by David McMillin Written by Contributing writer David McMillin is a contributing writer for Bankrate and covers topics like mortgages, credit cards and credit cards, banking, taxes and travel. David’s aim is to help readers figure out how to save more and stress less.
Written by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since late 2021. They are committed to helping readers gain the confidence to control their finances through providing clear, well-researched information that breaks down complicated topics into bite-sized pieces. The Bankrate promises
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Therefore, this compensation may impact how, where and in what order products appear within listing categories 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, such as our own website rules and whether the product is available within your region or within your personal credit score could also affect the way and place products are listed on this site. While we strive to provide an array of offers, Bankrate does not include information about every credit or financial product or service. All loans come with risks in the event that they’re not paid on time. However, a car title loan has a particularly threatening consequence if you fail to meet your payment obligations: The lender can take your vehicle. Before you decide to take out an auto title loan it is essential to know the potential negatives of using your vehicle as collateral to borrow money. How do you define car title loans? The car title loan or «pink slip loan,» allows you to take out loans ranging from 25 percent to 50 percent of the value of your vehicle in exchange in exchange for giving your lender their title of your car as collateral. These short-term loans generally begin at $100 with repayment periods of between 15 and 30 days. Title car loans are designed for those with past credit challenges who require cash fast. Many lenders have minimal or no requirements for credit -and some don’t have any . The process of applying for a loan is generally simple, and if accepted, you could expect to receive funds as soon as 24 hours later, in some cases, it’s even faster. The ease of access also means 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 prohibited from offering the car title loans to customers. If you reside in a state in which the use of car titles loans are permitted, you will generally need to apply for a loan. Some lenders will offer these loans if your vehicle is nearly paid off, but it isn’t as prevalent. How do title loans work? Title car loans are available in a variety of different varieties. There are loans that are one-payment loans, meaning the borrower is required to pay for the full value of the loan and the interest fee within a month , or that is. The loan is repaid over 3 or 6 months, based on the lender. Although the word «car» could be included in the title of the product however, these loans are also offered for boats, motorcycles and other recreational vehicles. You can apply online or in person, but you’ll need a physical location to show your vehicle before the lender. Also, prepare to present the lender with a clear title, as well as a photo ID when applying for a car title loan. The lender might also require keys. The car will be yours throughout the loan period, until you fail to pay the loan. To illustrate how these loans operate, let’s say you own a car worth $5,000 and you find yourself in an emergency situation and require $1,000. A title loan lets you borrow against your vehicle so you can receive the $1000 quickly. Just as a mortgage uses the home’s equity as collateral while a title loan makes use of your vehicle as collateral. To get the title to your vehicle back the loan is to be paid in total, which includes the high fees the lender charges to provide the loan. These fees typically include an average monthly finance charge of 25 percent. This is equivalent to an APR at 300 percent. On a $1,000 loan that you take out, you’ll be charged an additional $250 in interest even if the loan is paid back within 30 days. If you’re in default in your payment and penalties for late payments are applied and imposed, your loan can cost a significant sum. Some lenders also charge processing, origination and document fees, driving the borrowing costs up even higher. You may also be required to obtain and pay for a roadside service plan for your car. There are downsides to title loans While getting a title loan could be simple however, it comes with serious costs and risks as per Graciela Aponte Diaz, director of federal campaigns for the Center for Responsible Lending. «If you are unable to pay back the loan in time the loan is rolled over to another cycle that has more fees,» says Bruce McClary the senior vice president of communication at the National Foundation for Credit Counseling. «It creates a very difficult circumstance for those already struggling to pay. This is the most precise definition of the debt cycle.» The main drawback to this is the potential to lose your car. If you’re unable to pay back the loan, the lender may take your car and then sell it to get their money. And this isn’t all that common. A study by the discovered that 20% of people who take out title loans have their vehicles seized. Even worse, «some car title lenders install a GPS device — nicknamed a ‘kill switch’ -which could stop the car of the borrower from starting and use this as a means of collecting an amount of debt or making it more easy to take the vehicle,» Aponte-Diaz adds. Given the very real risk of losing your primary means to travel, it’s easy to see how a title loan can be a stressful and stressful experience. Alternatives to title loans With all the negatives, McClary recommends reaching out to traditional banks and credit unions to identify less costly loan options. Also, you could make use of a credit card if you have one in your possession for your immediate cash requirements. Even in the absence of an existing bank account, have a lower credit score or have struggled with poor financial decisions in the past, it’s worthwhile to look into every option. «It’s fascinating how flexible traditional lenders can be,» McClary says. «There are a lot of credit unions that are willing to work with unbanked customers.» You can apply for personal loan Although qualifying for personal loan could be difficult for those with bad credit, you may have choices. Certain online lenders may be qualified to apply for. If you’re a credit union member You can also try explaining your situation to a banker. They may be able to approve a loan depending on the quality of your relationship as well as your banking history. You can also request a relative or friend who has a stable source of income and strong credit score to make an application with to increase the odds of getting approved. Look for an payday alternative loan Payday alternative loans are a cheaper option to consider. They’re offered through certain credit unions, however you have to be a member in order to get access to these loan product. Loan amounts range between $200 and $2,000 payable over one to 12 months. The fee for application is set at $20. You’ll not pay more than 28 percent interest. This makes payday alternative loans cheaper than title loans and some bad credit personal loans. Utilize a credit card can also apply for credit card in the event that you have a dire financial crisis. It is also possible to pull funds through your credit card through a . Be mindful that the rate of interest for cash advances tends to be greater than the rate you’ll pay for purchases, up to 30% variable. There’s also no grace period and interest will begin accruing immediately. Be prepared to pay an ATM fee for withdrawing funds. McClary rarely advises adding to credit card debt however he believes it’s a better choice as opposed to the traditional title loan because you’re likely to pay less in interest than you would with a car title loan. The bottom line: Car title loans are a great alternative to get cash fast. Still, the costs are generally not worth the risk involved and you may be in a worse situation than before you took your loan. Look at alternatives that are less expensive such as a credit card or personal loan as well as a payday alternative loan prior to settling on a car title loan. However, if you’ve exhausted all your options and are forced to use a car title loan, be sure to review the fine details. Title lenders have to provide you with loan conditions in writing prior to signing. Federal law requires that they be honest and upfront about the cost for the loan.
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Written by Contributing writer David McMillin is a contributing writer for Bankrate and covers topics such as credit cards, mortgages banking, taxes, and travel. David’s goal is to help readers understand how to save money and worry less.
Editor: Rhys Subitch The edit was done by Auto loans editor Rhys has been writing and editing for Bankrate from late 2021. They are passionate about helping readers gain confidence to control their finances with concise, well-studied information that breaks down complicated topics into digestible pieces.
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