What is a title loan?
A title loan is a loan that requires an asset as collateral. Title loans are popular for two main reasons. First, the credit score of an applicant is not taken into consideration when determining the qualifications for the loan. And second, with more flexible application requirements, a title loan can be approved very quickly for amounts as low as $ 100.
Key points to remember
- A loan that requires an asset as collateral is called a title loan.
- Title loans are popular because they do not take into account the credit rating of the applicant and because they can be approved very quickly.
- The most common type of title loan is a car title loan, where the car itself is the collateral asset.
- Securities loans are usually taken out by people in need of money quickly or by people in financial difficulty.
- The costs of securities lending are prohibitive and they are considered a poor financing option.
How a title loan works
The most common form of title loan is the car title loan. In this case, a potential borrower is required to own a car and transfer the title to a car loan company. The loan company will lend up to 25% of the total value of the car to the borrower and will keep title to the car as collateral in the event of default.
Typical car title loan amounts are $ 1,000, although they can be higher. The usual loan term is 15 to 30 days but can be longer. Borrowers can pay off the auto title loan in a single installment, usually after one month, or repay the loan on a multi-year installment plan. If a borrower does not repay the title loan as per the repayment agreement, the car can be repossessed immediately by the auto loan title company. The loan company also has the option of letting a defaulting borrower make interest payments only for periods of one month, effectively deferring the loan amount indefinitely until it is paid off.
Title loans can seem attractive to people with bad credit or those in financial difficulty who need quick cash. However, there are exorbitant costs associated with title loans, especially car title loans, which should give borrowers pause.
The annual percentage rate (APR) on an average car loan can be as high as 300% and is almost always over 100% interest. The high APR can cause a financial treadmill where borrowers can never catch up and pay off the loan principal. For this reason, auto title or auto title lenders are sometimes referred to as “predatory lenders” because they tend to prey on people who need money in emergency situations.
Example of a title loan
Take, for example, a $ 500 car title loan that must be paid off within a month and carries an APR of 240%. This comes down to a monthly rate of 20%. With these conditions, the borrower will have to pay the auto title loan company $ 600 in principal and interest to repay the debt. For people who need $ 500 quickly, paying an additional $ 100 in interest within a month can lead to additional financial hardship.
Or consider a $ 5,000 auto title loan that must be paid off in 24 monthly installments with an APR of 108%. In this scenario, a 24 month auto title loan, with monthly compounding, will cost the borrower $ 7,362.71 in interest charges on top of the original principal of $ 5,000, for a total amount of $ 12,362. , $ 71. And it does not include fees.
Other options for titling loans
Although securities loans can be a tempting option in times of financial difficulty, they often put a person in a worse financial position than before, due to high interest rates and fees. The financial world is big and there are many better alternatives to securities lending.
Some other options include credit cards, although they have high interest rates, they are not as high as those for securities lending. Before getting into more debt, however, a person can renegotiate their current debt with their bank or credit card company. They can also often request an extension of their debts from their creditors, and they might be willing to comply in the short term. Taking out an unsecured personal loan is preferable to a guaranteed loan where collateral must be provided. Although unsecured loans have higher interest rates compared to secured loans due to the increased risk to the lender, personal loans offer better rates than those offered for securities loans.
When considering an unsecured loan, it is worth using a personal financial calculator to see how an interest rate will affect the total interest paid at the end of the loan.