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 you should consider before applying for a loan with an auto title lender.
Pros and Cons of Auto Title Loans: How They 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 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”, says Fred Winchar, president of TMG Loan Processing, an auto title loan broker.
Compare the pros and cons to make a better decision.
- Anyone (with a car) can qualify
- Quick cash
- You keep the car
- High-interest rates
- You could lose your car
- Repossession may not be the end
Pros of Auto Title Loans
Depending on your needs and credit profile, there are some benefits of applying for loans offered by auto title lenders.
Anyone can qualify
Because you’re using your car as collateral, auto title lenders typically don’t run a credit check. If your credit is so bad you don’t have any other borrowing options, this option can get you the cash you need. All you need is a working car.
The application process for 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 title loans
As a whole, title loans are stacked in favor of the lender. Make sure you understand their disadvantages 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. There are late fees, cash advance fees, loan application fees, finance charges, and all kinds of additional fees to consider.
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 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 a 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.
How do auto equity loans work?
A car title loan is similar to a payday loan it’s a small loan for a short period of time, usually 30 days. In exchange for the loan, you give the lender the title to your car until the loan is paid in full. To get a title loan, you need to have equity in your car.
How much can you borrow from a title loan?
The amount you can borrow is based on the value of your car or the equity you have in the vehicle. The greater the value, the more cash you can receive. Usually 25% to 50% of the value of the car. According to the FTC, the average loan amount is $100 to $5,500, but some lenders allow you to borrow up to $10,000, and even more.
Do auto equity loans affect your credit score?
Usually, a title loan will not affect your credit either way so long as your vehicle is not repossessed. Car title loans will be reported to credit bureaus in the case of vehicle repossession, and that has the potential to knock you down a few notches. Not only is losing your car a disaster for your daily life, but it will also harm your credit for years.
Do car title loans need credit check?
While some states require lenders to run a credit check, most don’t. What’s more, title lenders don’t even need to check your income in many states to make sure you can repay the loan.Can I get a title loan without an income?
Can I get a title loan without an income?
Yes, you can. For all their disadvantages, this is one of the few financing products available to people without a source of income. The only thing they require is your title (proof that you own your car). Your car serves as its own collateral.
What’s needed for the title loan?
When applying for a title loan, you’ll need: Your clear vehicle title. A valid government-issued ID. Other documents that may be required by your state, such as proof of income, proof of residency, or a valid vehicle registration.
Do I have to repay a title loan if I wreck my car?
If a collateralized vehicle gets so damaged in an accident that it is declared totaled (which means that it is beyond repair), then the liability insurance company will pay off the loan. Unfortunately, if the borrower and lender did not use liability insurance, then the borrower will still be responsible for repayment of the debt.
Why are title loans a bad idea?
If you need cash, you have a bad credit history and you own a car without payments, a title loan might seem like an easy way to get some fast cash. However, title loans and payday loans should only be a last resort. They are among the most expensive kinds of credit you can get, along with payday loans and pawnshops. The equivalent annual percentage rate of can go into the triple figures. Plus, you could also lose your car if you can’t make payments.
Should you get a title loan?
“A title loan can be the last resort for people with a bad credit history who have exhausted 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.
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.
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.
Ben Luthi is a personal finance writer and a credit cards expert who loves helping consumers and business owners make better financial decisions. His work has been featured in Time, MarketWatch, Yahoo! Finance, U.S. News & World Report, CNBC, Success Magazine, USA Today, The Huffington Post and many more.