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What Is A Title Loan?

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Len Penzo
What Is A Title Loan?

A title loan is a short-term loan for a limited sum of money. You give the lender the title of your vehicle as collateral. Once approved, you must pay the lender back after 30 days. Title loans may be very costly and if you default on payments, the lender has every right to take possession of your car.

How A Title Loan Works?

The application process is rather straightforward and approval takes 15 to 45 minutes. Given lenders don’t check credit score when reviewing your application, even borrowers with poor credit are eligible for this type of loan.

There are two types of title loans:

  • Installment Loans – Pay in monthly payments, generally spanning across three to six months. The average APR is 
  • Single-Payment Loans – Repay in one installment, usually a lump sum after 30 days. The average APR is 300%.

For starters, you need a car on your name, preferably clear of dues and other legal formalities. Other than all of the documents of the vehicle, you will need a checking account and proof of identity to get quicker approval. Once your application is approved, you need to submit the title of your car to the lender.

In general, while the loan is outstanding, you can continue driving the car, but some lenders will attach a GPS unit to the car and/or make copies of the keys. This is done so that the lender can easily repossess the car if you default on the loan. On average, you can get any amount between $100 to $10,000 or more. The repayment terms are 15 to 30 days, but can be extended up to a year depending on the chosen lender.

Title Loans And Their Interest Rate

Title loans are costly, and you can expect an APR of 300% or higher. Hence, your regular title loan costs three times the amount you initially borrowed in fees and interest. Technically, these loans are just a month-long with an interest rate of 25%. This rate varies by the state rules. In some states, legislators put a cap on the loan prices that can be paid for auto titles, while other states let lenders decide individual prices.

For instance, if you take a loan of $1000 at a 25% monthly interest rate for 30 days, you pay an interest of $250. On top of this hefty interest, you’ll also need to pay charges for loan origination, processing, and other fees.

How Much Does A Title Loan Cost?

A title loan’s costs can add up quickly. First, there is a high-interest rate. Next, there are additional charges on the loan. When you add these numbers, your total amount outstanding grows accordingly. Moreover, the repayment terms are shorter, and this leads to missed payments. Alternatively, if you choose an extended term, you’ll end up paying way more than you borrowed.

Let’s say you need $2000 immediately. Based on the car, the lender offers you a rate of 36% and a term of 3 months. This means you’ll pay an interest of $720 per month or $2,160 for 3 months. The interest is equivalent to the loan amount. So, you end up paying more than $4,000 for an urgent need of $2,000.

Consider another situation wherein you’re unable to make payments and request an extension. At 3 months, your total amount outstanding is $2,000 in principal and $2,160 in interest for a grand total of $4,160. If the lender agrees to a 30-day extension, you’ll now have to pay the interest on the total outstanding amount and not what you had initially borrowed. Finally, if you’re unable to make payments, the lender has every right to take possession of the vehicle and sell it to compensate for their losses.

As you can see, these costs can stack up quickly. Hence, we recommend that you consider other financing alternatives before applying for a title loan.

Alternatives To Title Loans

Title loans are tempting, especially because they’re easy to get. However, it also is accompanied by high rates and can lead to a debt trap if you miss payments. Here are some alternatives worth exploring before considering a title loan:

  • Talk with the lender – If you’re facing a temporary financial crunch, try speaking with the lender for an extension or new terms.
  • Apply for a payday loan – For smaller amounts, try applying for a payday loan. The fees involved are much lower than title loans.
  • Auto repair financing – You can apply for a personal loan like a car repair loan if you need quick cash. Based on your credit score, you can get competitive rates.
  • Borrow from friends/family – Try borrowing the required amount from friends and family. You won’t have to worry about excessive interest, fees, and losing your collateral.
  • Use a credit card – Using a card to pay off existing loans is a cheaper option than title loans. Most cards also run offers for balance transfers, so make sure to leverage those if available.
  • Unsecured loans – Rather than using collateral, try applying for an unsecured personal loan. These also have lower rates than title loans.

Title loans provide quick funds but can force you into a debt trap if you aren’t able to repay on time. We recommend checking all available options before signing your car’s title away to a lender.