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A title loan is a short term, high interest loan that requires your car as collateral to borrow money. If you don’t have great credit and need to take out a loan, you might be browsing places that will accept your poor credit score or scarce credit history. Title lenders usually don’t check your credit history, but you might face other hurdles.
If you’re thinking about a title loan, here’s what you need to know before getting one.
What is a title loan?
A title loan is a secured loan that allows borrowers to use their vehicle as collateral. Since your car guarantees the repayment of the loan, the lender can repossess your car if you do not pay off the loan on time. Title loans are generally short term, high interest loans that have low requirements, which means that if your credit is low, you will still have the chance to qualify. Often times, credit scores and history are not taken into account at all.
How does securities lending work?
You can apply for a title loan from a lender that offers one, as long as you own your vehicle and have a non-lien car title. When you apply, you’ll need to show your lender your car, proof of ownership (your car’s title), and your license.
If approved, you will return title to your car in exchange for the loan. While the lender determines the terms of your loan, title loans typically have a term of 30 days, similar to payday loans. This means that you will make a lump sum payment at the end of your loan period. You are required to make payments on the amount you borrowed, plus interest and fees. Most lenders charge a monthly fee of 25% of the loan amount, which translates into an annual percentage rate (APR) of at least 300%.
This is where securities lending can become a headache. If you don’t pay off your loan on time, you can lose your car because it serves as collateral. So if you choose to take out a title loan, make sure you pay on time so you don’t risk losing your asset.
How much can you borrow with a title loan
Your loan limit is between 25% and 50% of the total car value, and the lender will examine your car to determine its value. Some loans are as low as $ 100, while others exceed $ 10,000 or more.
When Should You Get a Title Loan?
According to the Consumer Financial Protection Bureau (CFPB), 20% of car title loan borrowers have their car seized when they cannot pay off their loan in full. Car title loan lenders derive the majority of their business from borrowers who continually take out new loans to cover their old ones. More than half of auto loans become long-term debt, and more than four in five auto loans are re-borrowed because borrowers cannot pay them off in full in one installment.
For this reason, you should research alternative financing methods before taking out a title loan. Alternative payday loans from credit unions, personal loans from online lenders, credit cards, and even borrowing money from friends and family are all better options than the potential loss of your vehicle.
Advantages and disadvantages of securities lending
Before taking out a title loan, first consider the pros and cons. This can help you determine if this is the right decision for you.
Benefits of Securities Lending
- No credit check: Most title loans do not require a credit check. This is good news if you need to borrow money, have exhausted all other available options, and don’t have good credit to qualify for a traditional loan.
- Quick approval and access to funds: Since there is no credit check, lenders only take a few minutes to review your application and your vehicle. Once approved, you can receive funds almost immediately or within days.
Disadvantages of Title Loans
- Potential debt trap: The CFPB says more than half of auto title loans become a burden on borrowers. This means that borrowers continue to take out new loans to pay off old ones, continuing a cycle of debt they cannot get out of. This is harmful and dangerous because it keeps you in debt for months after your first loan.
- Exorbitant interest and fees: APRs for securities lending can be as high as 300%, due to interest rates, finance charges and other charges. These fees add up, which only further affects your financial obligations.
- Short repayment terms: Title loans generally require repayment within 15 to 30 days. Compare that to traditional loans, which typically have repayment terms of six months to three years, depending on how much you borrow. A 15-30 day repayment period doesn’t always give you enough time to find the funds to pay off the loan you borrowed, plus the high APR.
- You could lose assets: Car title loans can put you in a horrible situation: continue to rack up a heavy debt burden or hand over your car. Stay on top of your payments to avoid the potential charges that securities lending can bring.
Alternatives to securities lending
Almost all of the options available are probably better than a title loan. Here are a few to explore if you’re in a tight spot and need the cash.
Alternative payday loans
Alternative payday loans are small loans offered by federal credit unions (not all credit unions are federal). They are similar to securities loans, but do not require collateral. These loans offer small amounts but have more user-friendly repayment terms, such as affordable monthly payments over a few months.
You can borrow between $ 200 and $ 1,000, and federal credit union interest rates are typically capped at 18%. Additionally, credit unions tend to work with borrowers who don’t have a lot of credit to find a solution that’s best for them. However, you must be a member of a credit union to get an alternative payday loan.
Personal loans are generally unsecured loans that you can take out from a bank, credit union, or online lender. You can use them for almost anything you need and many offer disbursement of funds on the very day of your approval. Even with bad credit, you may be eligible for a personal loan.
While personal loans bear interest, rates typically peak around 36%, significantly lower than those for a title loan. However, you will only receive the maximum rate on a personal loan if your credit is bad or damaged. Borrowers with good credit can benefit from rates below 10%. Finally, the repayment terms vary from two to seven years, which allows you to make affordable monthly payments until your loan is paid off.
When you apply for a credit card, you are approved up to a certain credit limit, which you can use as needed. You usually have to pay off your balance every 30 days, and you can reuse your available limit as you pay it off. Any unpaid balance will begin to accumulate interest; however, credit cards have a much lower interest than title loans.
If you can afford to pay off your monthly balance, you are essentially borrowing an interest-free loan. Some cards even offer interest-free funding periods for an extended period, such as the first 12 months of holding your card. Using an offer like this is a convenient way to capitalize on inexpensive financing.
Friends and family
Ask around if you can borrow some money to avoid falling into the title lending trap. Your loved ones are not likely to charge harsh interest rates the same way payday loan companies and property titles are. They are also friendly enough to work out a repayment schedule that is right for both of you.
However, borrowing money from loved ones can put emotional, and sometimes financial, strain on your relationship. Take this route with caution and have a repayment plan in mind so that everyone is happy with the outcome.