Car title loans: What they are and how they work Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make smarter financial decisions by providing you with interactive financial calculators and tools as well as publishing unique and impartial content. This allows you to conduct your own research and compare information at no cost and help you make sound financial decisions. Bankrate has agreements with issuers, including but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The offers that appear on this site are from companies who pay us. This compensation could affect how and where products appear on this website, for example for instance, the sequence in which they be listed within the categories of listing, except where prohibited by law. This applies to our mortgage, home equity and other products for home loans. However, this compensation will have no impact on the information we provide, or the reviews you see on this site. We do not contain the vast array of companies or financial offerings that could be open to you. Barry Winiker/Getty Images
5 min read Published on 19 October, 2022.
Written by David McMillin Written by Contributing writer David McMillin is a contributing writer for Bankrate and writes about topics like mortgages, credit cards, banking, taxes and travel. David's mission is to assist readers figure out how to save more and stress less.
Editor: Rhys Subitch Editor: Rhys Subitch Auto loans editor Rhys has been editing and writing for Bankrate since late 2021. They are committed to helping readers gain the confidence to manage their finances through providing precise, well-studied information that breaks down otherwise complicated topics into bite-sized pieces. The Bankrate guarantee
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We are compensated in exchange for placement of sponsored products and, services, or when you click on certain hyperlinks on our website. This compensation could impact how, where and in what order items are listed in the event that they are not permitted by law for our loan products, such as mortgages and home equity, and other home lending products. Other factors, like our own rules for our website and whether the product is available within your area or at your personal credit score may also influence the manner in which products appear on this site. We strive to provide a wide range offers, Bankrate does not include specific information on every financial or credit product or service. All loans are risky when they aren't paid back on time. But a title loan carries an especially troubling result if you don't pay your obligations on time: The lender may take your vehicle. Before you consider getting the title loan it's important to know the potential negatives of using your vehicle as collateral to obtain money. What are car title loans? Car title loan, or "pink slip loan," allows you to borrow anywhere from 25 to 50 percent of the value of your vehicle in exchange for giving the lender the title to your vehicle as collateral. These short-term loans typically start at $100 with repayment periods of between 15 and 30 days. Car title loans are designed for those who have had credit problems in the past and require cash fast. The majority of lenders have low to no credit requirements -- some won't even . The application process is typically straightforward, and, if it is approved, you can anticipate receiving funds within 24 hours later -- often, even earlier. The ease of access implies that these loan products come with steep rate of interest. Certain states limit the amount of interest lenders are allowed to charge however, others have no limitations. Some states also have a ban on lenders are prohibited from offering car title loans to customers. If you reside in one of the states that allows the use of car titles loans are permitted, you will generally need to to obtain a loan. Some lenders provide these loans when your car is close to being paid off, but it isn't as prevalent. How do the title loans work? Car title loans are available in a variety of various types. Certain are single-payment loans which means that the borrower is required to pay for the entire value of the loan together with the interest fee within the month or as. The loan is repaid over three or six months, based on the lender. While the term "car" may be in the product name but these loans are also offered for boats, motorcycles and recreational vehicles. You can apply either online or in person however, you'll have to go to the location in person to show your car in front of the lender. Also, prepare to give the lender with clear title and a photo ID when applying for a title loan. The lender might also require keys. The car will be yours until the time of repayment unless you are in default of the loan. To show how these loans operate, let's say you own a vehicle worth $5,000 and you encounter an emergency and need $1,000. A title loan allows you to borrow against your vehicle so you can access the money quickly. Just as a mortgage utilizes the home's equity as collateral while a title loan utilizes your car as collateral. To obtain the title of your car back the loan must be paid back in full, including the steep fees the lender charges for the loan. These fees typically include an average monthly finance charge of 25 percent. This is equivalent to an APR of 300 percent. If you take out a $1000 loan that you take out, you'll be charged the additional amount of $250 for interest when the loan is repaid in just 30 days. If you're not on time in your payment and penalty charges are determined, the loan could cost you quite a bit. Some lenders also charge processing, origination and document costs, which can drive the borrowing costs up even higher. There is also the possibility of having to purchase and pay for a roadside service plan for your vehicle. The downsides of title loans While getting a title loan may be easy however, it comes with serious costs and risks, according to Graciela Aponte-Diaz, director of federal campaigns for the Center for Responsible Lending. "If you are unable to pay back the loan in time the loan is rolled over to another cycle, which incurs more costs," says Bruce McClary, senior vice president for communications with the National Foundation for Credit Counseling. "It results in a very stressful situation for those who are already struggling to repay. It is the most precise definition of the debt cycle." The main drawback, though, is the risk of losing your car. If you're unable to pay back the loan, the lender may take your car and then sell it to get the money. It's not all that common. A study from the found that 20% of people who take out title loans have their vehicles confiscated. Even worse, "some car title lenders use a GPS device, dubbed"kill switch"- that can prevent the car of the borrower from starting and use this as a means of collecting a debt or making it easier to seize the vehicle," Aponte-Diaz adds. Given the very real risk of losing your primary source of transportation, it's not difficult to understand the way a title loan can be a stressful and stressful experience. Solutions to the title loans With such serious downsides, McClary recommends reaching out to traditional banks and credit unions to discover less expensive loan options. You can also make use of a credit card if you have one available to cover your cash-flow needs. Even even if you don't have an existing bank account, have a low credit score, or have had financial issues previously, it's worth investigating all your alternatives. "It's fascinating how flexible traditional lenders are," McClary says. "There are plenty of credit unions who are prepared to deal with non-banked customers." Apply for an individual loan Although qualifying for personal loan isn't easy if you have bad credit, you may have options. Some online lenders you could be eligible to apply for. If you're a member of a credit cooperative, you could also consider communicating your situation to a banker. They may be able to approve a loan depending on the quality of your relationship and good credit record. You can also ask a friend or relative with a steady source of income and strong credit score to join to increase your chances of approval. Look for an payday alternative loan Payday alternative loans are another less costly option to look into. They're available through some credit unions, but you need to be a member in order to get access to these loan product. Loan amounts range between $200 and $2,000 payable over one to 12 months. The fee for application is set at $20, and you'll not pay more than 28 percent interest. This makes payday alternative loans cheaper than title loans as well as some bad credit personal loans. Use a credit card You could also make use of credit card in the event that you are facing a financial crisis. It is also possible to pull funds through your credit card through a . Be mindful that the interest rate for cash advances can be much more than what you pay for purchases -- anywhere from a to 30 percent for variable. Plus, there's no grace period, and interest will start accruing right away. Expect you to incur an ATM fee to withdraw your funds. McClary rarely advises adding to credit card debt however he says it's a better option as opposed to a title loan, as you're likely to pay less in interest than you would with a car title loan. The bottom line is that car title loans are a convenient solution to access cash quickly. However, the cost is typically too high for the risks involved as you could be in a worse position than you were prior to taking off the loan. Look at alternatives that are less expensive for a credit card or personal loan or payday alternative loan before you settle on a title car loan. However, if you've exhausted your options and are forced to use the car title loan, be sure to read the fine terms. Title lenders need to present you with loan terms in writing before signing, and federal law requires that they be transparent and honest about the total amount for the loan.
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Written by the writer who contributes to the column. David McMillin is a contributing writer for Bankrate and covers topics like mortgages, credit cards and credit cards banking, taxes, and travel. David's goal is to help readers discover ways to save more and stress less.
Editor: Rhys Subitch The edit was done by Auto loans Editor Rhys has been editing and writing for Bankrate since late 2021. They are committed to helping readers gain confidence to control their finances by providing precise, well-researched and well-documented information that breaks down complicated topics into digestible pieces.
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