No matter how hard you try to save for the future, sometimes surprise expenses happen that are out of your control. And if you don’t have cash on hand to pay it off, you’re left looking elsewhere for funds. When you’re in this kind of situation, an auto title loan is one way to get the money you need. Here are the pros and cons of auto title loans you should consider before making a decision.
How auto title loans work
An auto title loan is a short-term loan that uses your car as collateral. You must own the title to the car for it to work. In other words, you can’t already have a loan out on the car. In exchange for this secured loan, you hand over your title and a copy of your keys to the lender until you pay it off.
You need to have a car that has equity, usually double of what you need”
The repayment term for auto title loans can be as short as a few weeks or as long as a year or more, depending on which lender you choose. “You need to have a car that has equity, usually double of what you need” in terms of the loan, says Fred Winchar, president of TMG Loan Processing, an auto title loan broker.
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Pros of auto title loans
Depending on your needs and credit profile, there are some benefits of applying for an auto title loan.
Anyone can qualify
Because you’re using your car as collateral, auto title loan companies typically don’t run a credit check. If your credit is bad enough that you don’t have any other borrowing options, an auto title loan can get you the cash you need. All you need is a working car.
The application and approval process for auto title loans is typically fast. In most cases, you’ll have the money in your bank account within 24 hours. The amount you can apply for is based on the value of your car. For example, the lender may cap your loan amount at 50% of your car’s value, or some other percentage.
You keep the car
Even though you’ve handed over your title while you’re paying the loan back, you get to keep driving the car. Keep in mind, though, that the lender may ask you to buy extra insurance if your current policy doesn’t meet their standards.
Cons of auto title loans
As a whole, auto title loans are stacked in favor of the lender. Make sure you understand their drawbacks before applying for one.
Super-high interest rates and fees
Depending on where you live and which lender you work with, you could easily pay as much in interest and fees as you would with a payday loan. Make sure to shop around to get the lowest interest rate. For example, Finova Financial has interest rates that are much lower than the national average.
When choosing a lender, make sure you understand all the terms of the loan, including the interest rate and fees. “Several Federal laws mandate that the title loan company fully disclose all fees, rates, and issues,” says Winchar.
“Ask the company to explain each paragraph to you on the contract if you do not understand.” If they make things difficult, don’t be afraid to walk away.
You could lose your car
If you default on your loan, the lender has the right to repossess your car. Because the amount of the auto title loan isn’t worth the full value of the car, the lender can get much more value selling the car than they would if you had paid the loan back in full.
It can be easy to ignore this risk, says Winchar. “You are under stress, and you have one focus: to get money and deal with the consequences later.” Avoid making this mistake. Only take out an auto title loan if you are certain that you can pay it off in the allotted repayment period.
Repossession may not be the end
If you default on your loan and the lender somehow doesn’t get enough from the sale of the car to pay off your balance, you’re still on the hook for the difference. This usually doesn’t happen because the loan value is often lower than what the lender values the car. But it can happen if the estimate is off.
Should you get an auto title loan?
An auto title loan can be the last resort for people with bad credit and “when you have tried all other options to get the amount of money you need,” says Winchar. If you choose to go this route, make sure you exhaust all your other options first.
“Look at selling a few things if possible to get that cash, or at least lower the amount you will be needing should you go to a car title loan company for help,” Winchar adds.
Then, compare several auto title lenders to get the best terms on your loan.
If your credit is good enough to qualify for a personal loan, however, you could qualify for a much better interest rate and better repayment terms. What’s more, personal loans don’t require collateral so you wouldn’t have to risk losing your car.
Compare personal loan options to see which banks offer the best terms for your situation.
Also, use SuperMoney’s loan offer engine to see if you can get pre-qualified with specific lenders. This way, you can see an estimated interest rate before you apply.
As with any borrowing situation, take a step back to consider whether you truly need the money. Only you know what is essential and what isn’t. In some cases, what you originally considered an immediate need can wait until your next paycheck. Taking the time to consider all your options can help save you from putting your financial well-being in jeopardy.