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 you to conduct research and compare information at no cost to help you make sound financial decisions. Bankrate has partnerships with issuers such as, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make money The products that appear on this website are provided by companies that pay us. This compensation could affect how and when products are featured on this website, for example the order in which they be listed within the categories of listing, except where prohibited by law. Our mortgage, home equity and other home lending products. However, this compensation will affect the information we publish, or the reviews appear on this website. We do not contain the entire universe of businesses or financial deals that might be available to you. Barry Winiker/Getty Images
5 min read published on 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 banking, taxes, and travel. David’s mission is to assist readers discover ways to save money and worry less.
Editor: Rhys Subitch The edit was done by Auto loans Editor Rhys has been editing and writing for Bankrate since late 2021. They are passionate about helping readers gain confidence to manage their finances by providing clear, well-researched facts that break down complex subjects into digestible pieces. The Bankrate guarantee
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We are compensated in exchange for the promotion of sponsored goods and, services, or when you click on certain links posted on our website. So, this compensation can affect the way, location and in what order items are listed in the event that they are not permitted by law. We also offer credit, mortgage, and other products for home loans. Other factors, like our own proprietary website rules and whether or not a product is offered in your region or within your self-selected credit score range can also impact the manner in which products appear on this website. Although we try to offer a wide range offers, Bankrate does not include details about each credit or financial products or services. All loans come with risks if they’re not repaid promptly. But a title loan comes with a particular risky result if you don’t meet your payment obligations: The lender may take your vehicle. Before you decide to take out a title loan, it’s vital to know the potential disadvantages of using your car as collateral to obtain money. What are car title loans? A car title loan, or “pink slip loan,” allows you to borrow anywhere from 25 percent to 50 percent of the worth of your car in exchange for giving the lender their title of your vehicle as collateral. These short-term loans generally start at $100 with repayment periods of 15 to 30 days. Title car loans cater to consumers with credit issues in the past who need cash quickly. The majority of lenders have low or no requirements for credit — some won’t even . The process of applying for a loan is generally straightforward, and, if it is approved, you can anticipate receiving funds within 24 hours later — in some cases, it’s even faster. The ease of access implies that these loan products have high rate of interest. Some states limit how much interest lenders can charge while others have no restrictions. In some states, lenders are prohibited from offering car title loans to customers. If you reside in one of the states in which the use of car titles loans are allowed, then you will generally need to apply for a loan. Some lenders provide these loans for vehicles that are close to being paid off, but it isn’t as prevalent. What is the way that titles loans function? Title car loans come in a range of different varieties. Some are single-payment loans and the borrower is required to pay for the total value of the loan plus the interest rate fee within a month , or that is. The loan is repaid over the course of three or six months, depending on the lender. While the term “car” may be in the product name, these loans also can be available for boats, motorcycles and recreational vehicles. You can apply on the internet or in person, but you’ll need to visit an actual location to present your vehicle in front of the lender. Make sure you give the lender with an unbroken title as well as a photo ID when applying for a title loan. The lender may also require keys. The car will be yours throughout the loan period, unless you are in default of the loan. To illustrate how these loans function, suppose you own a car worth $5,000 and find yourself in an emergency and require $1000. A title loan allows you to use your vehicle as collateral so you can receive the $1000 quickly. Similar to a mortgage that utilizes your home as collateral while a title loan uses your vehicle as collateral. In order to get the title of your car back, the loan is to be paid in total, which includes the high fees the lender charges to provide the cash. These fees typically include an average monthly fee for finance of 25 percent, which amounts to an annual percentage rate of 300 percent. For a $1,000 loan it will cost you the additional amount of $250 for interest, even when the loan is repaid in just 30 days. If you’re not on time with your payment and late payment penalties are determined then the loan can cost a significant sum. Some lenders will also charge processing, origination and document fees, driving the borrowing costs up even higher. There is also the possibility of having to obtain and pay for a roadside service plan for your vehicle. There are downsides to title loans While the process of getting an auto title loan could be simple, the convenience comes with significant costs and risk according to Graciela Aponte Diaz, director of federal campaigns for the Center for Responsible Lending. “If you don’t repay the loan in time the loan is rolled over to another cycle, which incurs more costs,” says Bruce McClary the senior vice president of communication at the National Foundation for Credit Counseling. “It results in a very stressful situation for people who are already struggling to repay. It’s the specific definition of the debt cycle.” The main drawback, though, is the risk of losing your vehicle. If you’re unable to pay back the loan the lender may take your car and sell it to recoup the money. And this isn’t all that unusual. A study by the discovered that 20 percent of the people who take out title loans are able to seize their cars. In addition, “some car title lenders have a GPS device — nicknamed”kill switch”which could stop the borrower’s car from starting, using this practice as a means of collecting the debt or making it more easy to seize the vehicle,” Aponte-Diaz adds. Given the very real risk of losing your primary source of transportation, it’s not difficult to understand the way an auto title loan could be stressful. Alternatives to title loans With such serious downsides, McClary recommends reaching out to traditional credit unions and banks to identify less costly loans. Or you can utilize a credit card when you have one in your possession for your immediate cash needs. Even in the absence of an existing bank account, have a lower credit score or have had financial issues before, you should consider all your alternatives. “It’s interesting how flexible these traditional lenders are,” McClary says. “There are plenty of credit unions who are prepared to deal with bankless customers.” Apply for an individual loan Even though getting an individual loan could be difficult for those with bad credit, you may have alternatives. Some online lenders you could be qualified for. If you’re a member of a credit union, you can also try explaining your situation to a banker. They may be able to approve the loan based on the strength of your connection and your credit history. It is also possible to request a relative or friend with a stable source of income and a strong credit score to make an application with to increase the odds of getting approved. Consider a payday alternative loan Payday alternative loans are a different, less expensive option to look into. They’re offered through certain credit unions, but you have to be a member to access these loan product. The loan amounts vary between $200 and $2,000 that are payable over a period of between one and 12 months. The cost of application is set at $20. You’ll only pay 28 percent interest. This is what makes payday alternative loans cheaper than title loans and some bad credit personal loans. Use a credit card You could also make use of a credit card if you have a dire financial crisis. It is also possible to take money out of your card using the use of a . Be aware that the interest rate on cash advances can be much greater than the rate you’ll pay for purchases — up to 30 percent for variable. Additionally, there is no grace period, and interest will begin accruing immediately. Be prepared that you’ll have to cover an ATM fee for withdrawing funds. McClary rarely advises adding to credit card debt, but she suggests it’s a better choice than the traditional title loan, as you’re likely to pay far less interest than with an auto title loan. The bottom line: Car title loans are an excellent solution to access cash quickly. Still, the costs are generally far from the danger involved and you may be in a worse position than you were before taking off the loan. Think about alternatives that are more affordable such as credit card, loan for personal use, loan as well as a payday alternative loan, before settling on a title car loan. If you’ve exhausted your options and are forced to use the car title loan ensure you review the fine terms. Title lenders must show you loan terms in writing before signing. Federal law requires them to be transparent and honest about the total amount of the loan.
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Written by Contributing writer David McMillin is a contributing writer for Bankrate and covers topics such as mortgages, credit cards tax, banking, and travel. David’s mission is to assist readers figure out how to save money and also stress less.
Edited by Rhys Subitch The edit was done by Auto loans editor Rhys has been editing and writing for Bankrate from late 2021. They are committed to helping readers gain confidence to take control of their finances through providing precise, well-researched and well-documented details that cut otherwise complicated topics into digestible pieces.
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