How Do Car Title Loans Work?

All loans carry risk if they are not repaid on time. One particularly troubling consequence of a car title loan, however, is if you default on your payment obligations: the lender can take your vehicle.

Before you consider getting a title loan, think about the potential potholes you will encounter if you use your vehicle as collateral to borrow money.

What is a title loan?


Definition of car title loan

An auto title loan is a short-term loan that allows you to get a small amount of money in exchange for handing over the title of your vehicle to the lender. You will also have to pay significant fees to borrow money.


Let’s say you own a car worth $ 5,000 and you find yourself in an emergency that requires $ 1,000. A title loan allows you to borrow against your vehicle, which allows you to quickly get that $ 1,000. Just like a mortgage is against your home, a title loan uses your vehicle as collateral.

“One of the biggest pieces of information people need to understand about a title loan is that it uses your vehicle’s equity to secure the money you borrow,” says Bruce McClary, vice-president. president of communications at the National Foundation for Credit Counseling. .

In most cases, you must own your vehicle to be eligible for an auto title loan. The term “car” may appear in the name of the product, but these loans may also be available for motorcycles, boats and recreational vehicles.

While some lenders will offer loans if a car is still in repayment, most require the owner to hold title without any debt related to the vehicle. Consumers can typically borrow between 25 and 50 percent of the value of the car.

How does securities lending work?

Car title loans come in many forms. Some are lump sum loans, which means the borrower has to pay the full loan amount plus interest charges within a month or so. Installment loans, with similarly high APRs, can be repaid over three or six months, depending on the lender.

When applying for a car title loan, be prepared to show the lender clear title, proof of insurance, and photo ID. Some lenders ask for a second set of keys.

While securing a title loan can be easy, the convenience comes with significant costs and risks, according to Graciela Aponte-Diaz, director of federal campaigns at the Center for Responsible Lending.

“Some auto title lenders install a GPS device – dubbed a ‘kill switch’ – that can prevent the borrower’s car from starting, using this practice as a way to collect debt or facilitate foreclosure of the car,” explains Aponte-Diaz. . “In addition to being (the) primary form of transportation to work, to the doctor and elsewhere, a car is often a person’s biggest financial asset. The looming threat of losing your car is anxiety-provoking, to put it mildly.

Disadvantages of Securities Lending

The main disadvantages of title loans are a short repayment period, very high interest rates, and the potential loss of your car if you default on your payment.

“These are generally short-term loans with very tight repayment cycles,” says McClary. “If you can’t pay off the loan when it falls due, it gets carried over to another cycle with more fees. This creates a very difficult situation for people who are already struggling to repay. This is the exact definition of the debt cycle.

In addition to tight repayment terms, auto title loans have extremely high interest rates. Lenders often charge 25% each month in finance fees. On a $ 2,000 loan, you will pay an additional $ 500 in interest if the loan is paid off in 30 days. If you are behind on your payment and those interest charges add up, the loan can end up costing much more than the original sticker price.

Perhaps the biggest downside is losing your car. If you can’t pay it back, the lender can take your vehicle back. In 2016, a study by the Consumer Financial Protection Bureau found that 20 percent of those who take out title loans have their vehicles foreclosed.

Alternatives to securities lending

With such drawbacks, McClary recommends reaching out to traditional banks and credit unions to explore other, less expensive lending options.

“A lot of people might avoid traditional lenders because of assumptions about their credit,” he says. “It’s the most dangerous thing you can do. You are depriving yourself of money that you could potentially save.

Even if you don’t have a bank account, have a lower credit rating, or have struggled with bad financial decisions in the past, it’s worth investigating all of your loan alternatives. “It’s interesting how flexible these traditional lenders can be,” says McClary. “There are a lot of credit unions that are willing to work with unbanked customers. “

McClary says he rarely advises increasing credit card debt, but stresses it’s a better option than a title loan. “If you have unused credit on a credit card, you can count on it to cover your costs,” he says. “In most cases, the interest rate on your credit card will be much lower than what you would get on a car title loan. And this route prevents you from potentially losing your vehicle.

At the end of the line

If you decide that a car title loan is your only option, make sure you understand the terms of the loan. Securities lenders are required to show them to you in writing before signing, and federal law requires them to be honest and upfront about the total cost of the loan. And remember, these costs are probably not worth the risk.

“Car title loans often lead people to get into debt and lose their cars,” says Aponte-Diaz. “Car title lenders often make people worse off than they were before they took out the loan.”

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