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Car Title Loans: What You Need To Know
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A car title loan can give you cash fast to pay bills or unexpected expenses — but it might not be the best option. If you fail to repay in time, you risk losing your car.
Before you decide to take out a car title loan, understand the risks involved with pledging your car as collateral and consider some alternative ways to get the funds you need.
What is a car title loan?
A car title loan is a short-term secured loan that lets you borrow up to a specific amount or certain percentage of the car’s value in exchange for using the vehicle’s title as collateral. If you qualify, you may be able to get money from a title loan as soon as within the same day. However, the lender could repossess your car if you fail to pay on time. Auto title loan lenders typically finance vehicles that are paid off, although some will also lend money on cars with loan balances. A car title loan on a car with a loan balance is called a registration loan.
The terms, loan amounts and interest rate will vary by state and lenders. The average auto title loan is $1,000, but can range from $100 to $10,000. A typical loan against a car title is for 15 to 30 days, though some states allow longer terms. You can get from 25% to 50% of the vehicle’s value — including boats, RVs and motorcycles. In addition to interest, you may also pay fees for loan origination, processing and documentation; these could be added to the loan amount, making your payment higher.
When applying for a loan against your car title, prepare to submit a loan application, your car and car title, proof of insurance, photo ID and, potentially, a set of car keys (not all states allow lenders to hold keys). Some lenders may also require you purchase a roadside service plan or install a GPS tracking device instead.
How do car title loans work?
Car title loans are known for having high interest rates that make it difficult to pay them off in time. A title loan may offer a monthly finance fee of 25%, but that translates into an APR of 300%, plus any additional fees. The average car title loan borrower pays about $1,200 in fees for the average $1,000 loan. And for the average borrower, making the auto title loan payment eats up about half their gross monthly income.
If you don’t pay off the car title loan by the end of the 15- or 30-day term, some states allow you to renew or roll over the loan into a new one. This step may let you keep your car, but it’ll increase the amount of interest you owe. You may also have to pay administrative fees and costs again, and the payment (including the amount of the loan and interest) may be due in a lump sum at the end of the term or may be payable in installments.
Benefits and drawbacks of car title loans
While a car title loan can get you money if you need it fast, you should be aware of its drawbacks. For many, it should be a last resort.
Fast cash: You can get cash as soon as the same day you apply, if you and your car qualify.
Limited credit check: Most lenders don’t run a credit check; instead, the loan is based on ownership and value of the vehicle.
Very short repayment terms: Terms are typically 30 days up to 12 months, depending on the state — however, some states may allow multiple rollovers.
High interest and fees: Average rates are 25% per month, or 300% APR, plus any documentation or processing fees.
If you can’t repay your loan, you could lose your car: The lender will sell your car if you don’t make all the payments, or sue you for the amount owed.
You must own or have significant equity in your car: The car should be paid off, or you’ll need to have paid off most of it in order to qualify for a loan. Some states allow only one loan on a car at a time.
Could owe more: If the lender repossesses and sells your car but it doesn’t cover the amount you owe, you could have to pay the balance.
Alternatives to car title loans
Before turning to a car title loan, there are other options to consider first. A payday loan isn’t a good alternative because, like car title loans, they too have very short repayment times and high fees. The list below features several suggestions that offer lower rates and potentially longer repayment terms at a lower total cost for borrowing.
Personal loan with a cosigner
Personal loans offer lower interest rates and longer repayment terms than a car title loan. An unsecured loan doesn’t require collateral for the loan, but the interest rates are typically higher than secured loans. Secured personal loans require some sort of collateral to back the loan, but this makes them easier to obtain and may come with more favorable terms.
If you’re concerned about your credit score and ability to get a personal loan if you have bad credit, you may want to consider applying with a cosigner. A cosigner is someone who agrees to repay the loan if you fail to make payments. This lowers the risk for the lender.
If you have a relationship with a bank or credit union, consider applying for a personal loan through them. Personal loans through a bank may also be secured or unsecured, but a local bank or credit union may offer more favorable terms than a large lender.
Credit card or credit card cash advance
Using a credit card could be an option if you need short-term funds — but if you can’t pay off the expense in full by the time your payment is due, you’ll have to pay higher interest. The average credit card rate for new card offers ranges from 16% APR to 23.23% APR for standard purchases, depending on your credit. Interest rates for credit card cash advances are even higher — up to 25% APR, plus advance fees — so be aware of the costs involved. Still, these rates are usually much lower than those of a car title loan.
Negotiate with your creditors
Before deciding you need to take out a new loan, talk to your creditors. Explain your situation and ask for an extension, lower rates, a different payment schedule or have them waive extra fees — they may be willing to work with you.