How Do Title Loans Work?

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One type of personal loan you can obtain is called a title loan which uses your vehicle (or motorcycle or boat) as collateral. It gets its name from your vehicle title, the pink slip, which proves you own your vehicle. Title loans are very different from auto loans, which help you to initially purchase your vehicle. They usually come with high interest rates or monthly fees. Note that government and consumer protection agencies consider many title loans to be predatory and suggest looking for other financial solutions first.

TL;DR (Too Long; Didn't Read)

Title loans are for relatively small amounts of money that must be paid back, with interest or a fee, in a short period of time. If you do not pay back the loan in time, the lender could take your car.

The Basics of Title Loans

The exact process of obtaining a title loan differs depending on the lender. Generally, you apply with an appropriate lender who requires seeing a photo ID, your vehicle, the vehicle title and proof of auto insurance. You usually must own your vehicle (it cannot be financed), and there cannot be any liens on the title. If you have not finished paying off your car, then this option may not be available to you.

If the lender approves your loan, you sign the paperwork, the lender gives you the money and keeps your title. The lender may also require you to provide spare keys.

Title loans are popular, because they do not require a certain credit rating, which in turn enables lenders to approve loans quickly. A personal loan from a bank or credit union typically requires a particular credit score and other financial factors that demonstrate you can pay back the loan. It can also take days or weeks to go through.

You could obtain as little as $100 and up to $1,000 in a title loan. In some cases, you may be able to borrow a more significant amount.

Most title loans must be paid back quickly, such as within 30 days. However, there are also title loans that allow you to pay back a greater amount of money over a few years.

The Cost of a Title Loan

Not only must you pay back the amount you borrowed, you also must pay back an extra fee or interest.

Some lenders charge a monthly financing fee of as much as 25 percent of the amount you borrow. If you borrowed $1,000, then 25 percent would be $250.

Or, instead of a monthly financing fee, the interest may be described as the annual percentage yield or annual percentage rate. The APY is the annual rate of return on a loan, including compound interest. It denotes how much interest the loan will accrue over one year. APR is simply your interest rate calculated for a 12-month period. If a loan is described as having a 5 percent monthly interest, then the APR would be 60 percent. For most title loans, the APR is above 100 percent. In fact, you could be charged 300 percent APR or more.

No matter how a lender describes a title loan fee or interest rate, you need to calculate how much that will cost you if you pay back the loan in one month or more. If you pay back a loan in one month, then a high APR may feel manageable. However, for loans with installment plans, the longer you have to pay it back, the more interest you will pay.

If You Fail to Pay Back the Title Loan

If you cannot pay the full amount the day it is due, then a couple of things may happen. The lender may allow you to rollover the loan, which lets you borrow the money for another month. This will cost you another monthly fee. For an original $1,000 borrowed, you would now owe $1,500 or more, depending on how the lender calculates the fee.

If you cannot repay the lender and it will not let you rollover your loan, then the lender can take control of your vehicle, which is known as repossession. The lender then has the right to sell your vehicle and retain all of the profits.

A title loan is a legitimate loan that will appear on your credit report and can affect your credit score. If you fail to pay it back in time, the lender could report you delinquent and then your credit score would go down.

If You Are Going to Get a Title Loan

If you decide a title loan is right for you, the best thing to do is carefully read all of the paperwork and understand what you will owe and when. Only borrow as much as you know you can pay back, including all interest and fees. Make sure you are clear on what happens if you cannot repay the loan.

References

About the Author

Victoria E. Langley is a legal content writer living in the Pacific Northwest. She holds a B.A. in philosophy from Northern Illinois University and a J.D. from the John Marshall Law School of Chicago. She has worked as a clerk for a boutique law firm handling breach of contract litigation, a corporate document reviewer, and a legal counselor for a transactional law clinic. She now focuses on translating legalese into everyday language for firms around the country. Her work has appeared on the U.S. News Law Directory and many law firm's sites. Learn more from her website, langleylegalwriter.com