Title loans use the title of a vehicle as collateral or ‘security’ for a loan. This means that should the borrower fail to make their repayments, the lender is able to repossess their vehicle in order to recoup their losses from the borrower. Title loans are considered a type of secured loan, as they are literally ‘secured’ by an asset. This is in contrast to unsecured loans and personal loans including the likes of credit cards, which do not require the pledging of an asset but as such may come with higher rates of interest.
Title loans are popular, as due to their inclusion of collateral, they may not require a credit check and lenders may be more willing to help you if you need to borrow money if there is an asset at stake, which in the worst case, a lender can seize to make up for their losses should the borrower default. Title loans can be very easy to apply for and often, they will have very short application processes. Due to the sometimes more relaxed application requirements of these loans, they can be applied for quickly and attained with ease by those in need of quick emergency cash.
Title Loans Explained
Title loans use a valuable asset that a borrower pledges as security for the loan, but the most common is a car title loan, a short-term loan in which the borrower pledges their car as collateral. If the borrower fails to repay the loan, the lender can then take ownership of the car and sell it to recover the money they have lost.
Typical car title loans offer around $1,000 to the borrower, though this amount can be higher if necessary and will be dependent upon the value of the car or vehicle in question. As these loans are short-term, the borrower will then be expected to repay this amount plus interest in a month’s term.
However, the repayment of this loan in such a short period of time can be a difficult feat. Car title loans also come with extremely high-interest rates, making it tricky for a borrower to find the cash to repay their lender and recoup their asset before their repayment term is up.
How Do I Know If I Should Apply For a Title Loan?
Due to the nature of these loans, they are handy for those who are in need of some fast cash. Title loans can be applied for and approved quickly, and although the typical car title loan allows you to borrow $1,000 and sometimes even more, title loans can lend as little as $100.
As title loans require collateral, they are also particularly useful to those who do not have a high credit score. If you have a poor credit score, you may struggle in applying for a loan at a regular bank. As such, a title loan can offer a way out to poorly credit rated borrowers.
Therefore, title loans would best serve those who would rather not have their credit rating taken into account and need money transferred to them quickly at a time of financial difficulty.
Can I Get a Title Loan At The Same Time As Other Loans?
The short answer to this question is yes. Much like other loans; secured and unsecured, you may be able to get a title loan at the same time you have other loans like payday loans outstanding. Some lenders will allow you to borrow the money you need whilst you are already repaying another loan. However, some states place restrictions on having more than one loan at once and therefore you should always check the local laws around payday lending before applying.
When it comes to title loans, because there is an asset on the line that can be taken by the lender to make their money back if a borrower defaults on their repayments, they may be more willing to lend than in cases of unsecured loans. Ultimately, the risk to a lender of a borrower missing their scheduled repayments is reduced, when there is an asset like a car or vehicle on the line. Therefore, lenders may well be more willing you allow borrowers to take out title loans at the same time as other loans.
Is A Title Loan A Good Idea?
Even if you find yourself in a position where a title loan would be a useful option, it would be best to avoid them is possible. These loans can end up costing you more money than you may have planned for, due to their high annual percentage rate (APR). In fact, the average APR on car title loans is usually always over 100% and can even be as high as 300%.
As such, car title loans are generally viewed as an example of subprime lending – loans typically made to borrowers who have lower incomes and poor credit ratings, often unable to obtain other forms of financing.
Therefore, title loans should only be withdrawn if it is an absolute necessity to help avoid you falling victim to predatory lending.
Particularly if the collateral you use to secure your title loan is essential to you, for example, if you need your car in order to transport yourself to work, this loan may simply be too risky a gamble.
Alternatives to taking out a title loan include:
- Borrowing from friends or family
- Renegotiating your debt, if only short-term, to allow you to build funds
- A credit card loan, which offers lower rates of interest
- Getting an advance on your pay cheque
- Taking out a form of unsecured personal loan, this will avoid you losing any assets and unsecured loans often offer better rates than secured title loans
If these alternatives cannot be exercised and you need cash fast, a title loan may be right for you as long as it is not taken out too frequently and is approached with a responsible repayment plan in place.