At some point in life, everybody will need a loan. Everybody from the hourly worker to the multi-millionaire will need to borrow money. Sometimes they’re needed for emergency situations, sometimes they’re needed to make your rent payment between paychecks, and sometimes they’re needed as a business investment.
The general principle of taking outa loan is that you get the money you need quickly, and the lender makes money over time as you pay them back with interest. It’s considered a win-win situation for both parties as long as they hold up their end of the deals.
Today, car title loans are one of the most popular forms of loans to receive. If you drive down the highway in your local town, you’ve probably seen the little shops with oversized signs and bright colors advertising “Title Loans, Cash In-Hand Today,” or something similar. If you’re reading this article, you’re either curious as to what a title loan is, or you’re seriously considering taking one out.
What is a Title Loan?
Let’s start by going over what a title loan actually is. The more accurate term would be a car title loan since it involves you giving up the title of your vehicle as a form of collateral. Essentially, you approach the title loan agent, get a quote on the value of your vehicle, and they offer to loan out a sum of money less than or equal to the value of your car.
You can usually get the money same-day or next-day at the latest and you’re expected to start making weekly or monthly payments starting after that. The condition of you taking out a loan is that you allow the lender to place a lien on your vehicle, which allows them to take your vehicle and sell it if you fail to pay back the loan.
Requirements for Taking Out a Car Title Loan
One of the reasons why car title loans are so popular is that the requirements aren’t very strict. You don’t need to have a great credit score, have a six-figure job, or own a luxury vehicle. All you need is proof that you make a steady weekly paycheck (verified by pay stubs or a call to your employer) and a title to a vehicle that you own.
It’s important to note that you cannot take a title loan out on a car that you’re still making payments on as these vehicles are still technically owned by the dealership or financial institution which you are making payments to. You also cannot take out a loan on a vehicle that is not directly in your name. Another important thing to note is that you do not have be the primary driver of the vehicle. All you need to do is prove that you own the vehicle, which means that you can take out a loan even if your license has been suspended.
Are Title Loans Legal in Every State?
Unfortunately, some lenders have practiced “predatory lending,” where they take advantage of their borrowers with outrageous interest rates that they could never hope to pay back. Because of these instances, quite a few states have criminalized or at least placed regulation on car title loans. According to Wikipedia, the following states below currently allow title loans:
- New Hampshire
- New Mexico
- Rhode Island
- South Carolina
- South Dakota
Most of these states have regulations in place that define how much a lender can loan you and the maximum interest rates that they are allowed to charge. You should take a minute to review the restrictions and terms in your home state before you make a final decision.
The Advantages of a Title Loan
Car title loans have quite a few advantages over traditional bank or credit card loans, which is why they have some obvious appeal. The three most notable advantages are quick money, an easy approval process, and convenient locations.
Sometimes, when you need money, you need it now. You can’t afford to wait two weeks for a bank to approve your loan application or for a credit card company to accept and send you your new card.
With a title loan, you can usually get your money the same exact day that you apply for it as long as the bank is open. If not, the longest you will have to wait is until the next business day. Some lenders even offer direct deposits, in which case you don’t have to make a trip to the bank at all.
Another great thing about title loans is that you aren’t approved or rejected based on your credit score. After 2008, it became very hard to get a line of credit unless your score was over 650. Because of these strict approval terms, many people couldn’t find a traditional lender who would loan them what they needed. Since a car title loan is based solely on the value of your vehicle and your ability to keep up with payments, you don’t have to worry about what your credit score is.
Title lenders have made convenience and location a priority for their customers. Just like banks, you can find a title loan store situated on major intersections throughout the United States. In some states, lenders have even purchased old fast-food locations. Needless to say, finding a store in your city shouldn’t be too difficult. In fact, Titlelo has a great tool that can help you find the closest title loan places near you. Just enter your city and you’ll be able to sort nearby lenders by radius, distance, reviews, and hours.
The Drawbacks of a Title Loan
For all of the convenience that a title loan offers, it still has a few notable drawbacks. The most notable are that they are often high-interest loans, you’re risking your car, and you can only borrow up to the value of your vehicle.
Higher Interest Rates
Some states have strict regulations that only allow lenders to charge a 30% interest rate on your title loan. Most others, however, are a lot more lax and allow lenders to charge 100% interest rates or more. That means that you could end up paying back double the money that you borrowed if you stick to monthly payment plans instead of paying it off quickly.
Loan Amount Depends on Car Value
The lender will do an appraisal of your car, and offer to lend you an amount that’s less than or equal to their appraisal. That means that if your car is only worth $2,000, you’re not going to be able to take out more than $2,000.
The Possibility of Losing Your Vehicle
When you accept the loan, the lender will put a lien on your vehicle. This means that they will take your title to the DMV, stamp their name on it, and will become the temporary “owners” of your vehicle. If you fail to make payments or decide that you want to default completely, they are legally authorized to tow your car and sell it to pay back the debt. Some lenders as reported by Saving Advice prey on this fact and try to entrap new borrowers with false advertisements.
If you wreck your car and still cannot pay back your loan, then the lender can pursue legal action against you in court. Although these situations are relatively uncommon, the court will usually allow the lender to garnish your wages until the debt has been paid.
Tips for Borrowers
Now that you’re familiar with some of the pros and cons of taking out a title loan, let’s take a few minutes to go over some tips that a responsible borrower should know.
Never Take Out More Than You Need
One of the biggest mistakes that first-time borrowers make is that they borrow more than they need, and take out the full appraisal value of their car. Unless you actually need that much, don’t borrow it. Take out only what you need for emergencies. Borrowing that extra $1,000 because you think it would be nice to go on a shopping spree with could mean that you’ll end up paying back $1,500 on it in the long run.
Make Payments Early or On-Time
Every year people are late on payments and get the threatening phone calls. Title loan agents are especially harsh. They will call your boss, your family members, landlord, and every phone number that you provided them in an effort to get in touch with you and get you to pay your debt. They are also legally authorized to take your car if you’re even a few days late.
You should always make an effort to make your payments early. If you plan on being a couple of days late, then make sure to call the lender and let them know ahead of time.
Pay the Loan off Quickly
As we mentioned above, car title loans can charge as much as 100% interest. Most lenders allow you to pay it off early for a reduced interest rate, however. That means that if you can pay your loan off in half the time that they give you, then you’ll only be charged half the interest.
Whenever you take out a loan, your number one priority should be to pay it off as fast as possible. Put in some extra hours at work, skip eating out, and throw everything you can into paying your title loan out as quickly as possible.
How do Title Loans Stack Up Against Other Short-Term Loans
Now, you may have heard about other short-term loans as well. Let’s take a few minutes to see how car title loans stack up against payday loans, refund loans, and personal loans.
Payday loans are arguably the second most popular form of short-term loans. The main difference is that your loan is based upon your weekly income instead of the value of your car. In most cases, payday loans are significantly less than car title loans. If you have a good job, then you may be able to take out a few thousand dollars, but in most cases, payday loans are for amounts less than $1,000.
Depending upon the value of your vehicle, you could potentially take out a loan greater than $5,000 with a title loan. This makes them a better choice for those who need a larger chunk of change.
Personal loans are usually given out by banks and independent lenders. They are for a specified amount and are usually designed to be paid off in less than a year. These are a good option for people who can afford to wait a few days for approval and are usually lower interest than car title loans.
However, personal loans usually aren’t immediate, and you are required to show your credit score. Many lenders will turn you down if you’re already in debt or you don’t have a good credit score. Title loans, while more expensive, don’t require you to have a good credit score, or to wait days for approval.
Refund Anticipation Loan
These are commonly found approaching tax season. They are special loans that are given based on your ability to pay them back out of your annual tax refund. They will run a preliminary test to see how much you’re expected to get back and offer you a certain set amount. One of the advantages of refund loans is that you don’t have to worry about making monthly payments.
However, unless tax season is close, a title loan is going to be considerably easier to get. You may have a situation where you owe taxes at the end of the year as well, which means that a car title loan may be your only option.
How to Find a Good Lender
There is a lot of competition between lenders. First, they must comply with your state’s laws on car title loans. However, outside of that, they will often give special incentives such as:
- No-interest for x amount of months
- No early payment penalties
- Offer to pay off existing title loans at a lower rate
- And more
Choosing a good lender can make a huge difference in your interest rate. Some of the best lenders are small family-owned lenders, as they are more likely to be understanding if you’re two or three days late on a payment. Larger lenders tend to be a lot more strict.
You usually have two options when looking for a lender:
- What’s available locally
- Online searches
One of the easiest things to do is to pick up the phonebook and call around town to compare rates. When it’s time to make your monthly payments, it’s also easy to stop in the office during your daily commute. You can also find title lenders online. Various services will search and compare rates for you and let you know who has the best deal in your state.
Taking out a car title loan is one of the easiest ways to get quick cash when you need it. As long as you’re a responsible borrower, make your payments on time, and don’t take out more than you need, then there is nothing to be afraid of. Just make sure that you read the fine print, and that you’re aware of the risks and the possibility of high-interest rates when you walk in the door.