Car title loans: What they are and how they work Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our aim is to assist you make smarter financial decisions by offering you interactive financial calculators and tools as well as publishing unique and impartial content. This allows users to conduct research and compare information for free – so that you can make sound financial decisions. Bankrate has agreements with issuers including, but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The offers that appear on this site come from companies who pay us. This compensation can affect the way and where products appear on this site, including the order in which they may appear within the listing categories, except where prohibited by law. Our mortgage, home equity and other home lending products. This compensation, however, does not influence the information we publish, or the reviews you see on this site. We do not contain the vast array of companies or financial offers that may be open 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 writes about topics such as mortgages, credit cards banking, taxes, and travel. David’s aim is to help readers understand how to save money and worry less.
Edited by Rhys Subitch Edited by Auto loans Editor Rhys has been editing and writing for Bankrate since late 2021. They are passionate about helping readers gain confidence to take control of their finances with concise, well-researched and informative information that breaks down complex subjects into digestible pieces. The Bankrate guarantee
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We receive compensation for placement of sponsored products and, services, or when you click on certain links posted on our site. So, this compensation can affect the way, location and in what order products are listed and categories, unless it is prohibited by law. We also offer loan products, such as mortgages and home equity, and other home loan products. Other elements, like our own proprietary website rules and whether or not a product is available in your area or at your personal credit score can also impact the way and place products are listed on this site. We strive to provide an array of offers, Bankrate does not include information about each credit or financial product or service. Every loans come with risks if they’re not repaid in time. But a title loan has a particularly threatening outcome if you fail make your payments on time the lender could take your car. Before you decide to take out a title loan, it’s vital to understand the potential disadvantages of using your car as collateral to obtain money. What are car title loans? A car title loan also known as a “pink slip loan,” allows you to borrow anywhere from 25 percent to 50 % of the value of your vehicle in exchange for giving the lender their title of your vehicle to use as collateral. These short-term loans generally start at $100, with repayment times of 15 to 30 days. Title car loans are designed for those who have had credit problems in the past and need fast cash. Many lenders have minimal to no credit requirements -and some don’t have any . The application process is usually straightforward, and, if it is accepted, you could expect to receive funding as soon as 24 hours later — often, even earlier. Access to loans is easy, which implies that these loan products are accompanied by high interest rates. Certain states restrict the amount of interest lenders can charge but others do not have any restrictions. And in some states, lenders are not permitted to offer auto title loans to consumers. If you reside in a state where automobile title loans are allowed, then you are likely to need apply for an loan. Some lenders provide these loans if your vehicle is nearly paid off, but it isn’t as prevalent. How do title loans operate? Car title loans come in a couple of different varieties. Some are single-payment loans which means that the borrower is required to pay for the full value of the loan together with the interest fee within the month or as. They are repaid in 3 or 6 months, depending upon the lender. While the word “car” may be in the name of the product however, these loans are also available for boats, motorcycles and recreational vehicles. You can apply either online or in person but you’ll need to visit an actual location to present your vehicle before the lender. Make sure you present the lender with clear title and a photo ID when applying for a title car loan. The lender might also require keys. The car remains in your possession until the time of repayment unless you default on the loan. To show how these loans work, assume you own a vehicle worth $5,000, and you encounter 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 makes use of your house as collateral the title loan utilizes your car 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 for the loan. These fees typically include an average monthly fee for finance of 25 percent, which translates to an APR that is 300 percent. For a $1,000 loan that you take out, you’ll be charged 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 penalty charges are assessed and imposed, the loan may cost quite a bit. Some lenders will also charge origination, processing and document charges, driving the borrowing costs up even more. There is also the possibility of having to purchase and pay for a roadside service plan for your vehicle. Downsides to title loans While the process of getting an auto title loan could be simple but it’s also a source of serious costs and risks, according to Graciela Aponte-Diaz, director of federal campaigns for the Center for Responsible Lending. “If you can’t pay back the loan when it’s due the loan is rolled over to another cycle that has more fees,” says Bruce McClary, senior vice president of communications at the National Foundation for Credit Counseling. “It creates a very difficult situation for those who are already struggling to pay. It’s the exact definition of the debt cycle.” The most significant drawback however, is the possibility of losing your vehicle. If you’re unable to pay back the loan the lender can take your vehicle and then sell it to get their investment. This isn’t unusual. A study conducted by the revealed that 20% of people who apply for title loans have their vehicles seized. And, even more alarmingly, “some car title lenders use a GPS device — nicknamed a ‘kill switch’ -which could stop the borrower’s car from starting, using this practice as a means of collecting a debt or making it more easy to take the vehicle,” Aponte-Diaz adds. Given the very real risk of losing your main means to travel, it’s not difficult to understand how an auto 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 lending options. Or you can use a credit card if you have one to meet your short-term cash requirements. Even even if you don’t have a bank account, have a low credit score, or have struggled with poor financial decisions in the past, it’s worth investigating the various options available. “It’s interesting how flexible these traditional lenders are,” McClary says. “There are many credit unions who are prepared to deal with bankless customers.” Apply for an individual loan While getting an individual loan isn’t easy if you have bad credit, you may have options. There are online lenders that you may be eligible for. If you’re a member of a credit union You can also try communicating your situation to a banker. They may be able to approve an loan in light of the strength of your relationship and good credit background. It is also possible to ask a friend or relative who has a stable source of income and a strong credit score to join you as a , strengthening the odds of getting approved. Consider a payday alternative loan Payday alternative loans are a cheaper alternative to think about. They’re available through some credit unions, however you need to be a member in order to get access to this loan product. Loan amounts range between $200 and $2,000 which can be paid over a period of one to twelve months. The cost of application is set at $20, and you’ll only pay 28 percent of interest. This makes payday alternative loans more affordable than car title loans and some bad credit personal loans. Use a credit card You can also apply for credit cards if you are facing a financial need. You can also pull funds out of your card via an . Be aware that the interest rate on cash advances tends to be more than what you pay for purchases — anywhere from a to 30% variable. There’s also no grace period. Interest will begin accruing immediately. Be prepared to pay an ATM fee to withdraw funds. McClary is not a fan of adding credit card debt but says it’s a better option as opposed to a title loan, as you’re likely to pay lower interest rates than you would for an auto title loan. The bottom line: Car title loans are a convenient option for getting fast cash. But, the price is usually far from the danger as you could end up in a more dire situation than before you took out the loan. Think about alternatives that are more affordable for credit card or loan for personal use, loan or payday alternative loan prior to settling on a title car loan. But if you’ve exhausted your options and are forced to use the title of your car loan make sure you be sure to read the fine terms. Title lenders have to provide you with loan terms in writing before signing, and federal law requires that they are transparent and honest about the total price of the loan.
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Written by a contributing writer David McMillin is a contributing writer for Bankrate and covers topics such as mortgages, credit cards banking, taxes, and travel. David’s aim is to help readers discover ways to save money and also stress less.
Edited by Rhys Subitch Editor: Rhys Subitch Auto loans editor Rhys has been writing and editing for Bankrate from late 2021. They are committed to helping readers gain the confidence to control their finances through providing clear, well-researched details that cut otherwise complex topics into manageable bites.
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