Are Auto Title Loans a Smart Move? (2021)
- Auto title loans are short term loans for small amounts of money.
- Acquiring a car title loan involves transferring ownership of your vehicle to the lender.
- Car loans can be subject to high interest rates and fees, which can make repayment difficult.
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If your bank account isn’t looking great and you have poor credit history, you may have considered a car loan as a quick way to get some cash. Although they are relatively small amounts of money, car title loans can be risky if you are not in tight control of your finances.
This article examines how auto loans work and weighs the benefits and risks of taking out them. To help consumers make informed funding decisions, our research team also scoured the industry to identify the best auto loan companies.
What are Auto Title Loans?
Unlike payday loans, which serve a similar purpose, car title loans work by placing your vehicle as collateral. These secured loans are intended for small amounts of money and often have to be repaid in a short period of time.
The Pew Charitable Trusts states that the average loan amount is $ 1,000. Since these are short-term loans – with maturities usually within 15 to 30 days – borrowers are usually expected to repay the remaining amount in one lump sum.
How do auto title loans work?
The process of getting a car title loan is relatively simple:
- First you fill out an application. Then show the rental company the car, the title and a copy of your photo ID. You may be asked for a duplicate set of car keys.
- If the loan is approved, the car title lender will exchange the money and keep the vehicle title.
- When it is time for repayment, you pay the lender a monthly fee in addition to the borrowed amount.
The monthly fee for a car title loan is usually very high interest. According to Federal Trade Commission, the average fee is 25%, which corresponds to an APR of around 300%. This can be expensive.
For example, let’s say you take out a $ 500 auto title loan with a financing fee of 25%. Twenty-five percent of $ 500 is $ 125 added to the final amount due. So at the time of repayment, you would owe $ 625.
Applying for auto title loan
Borrowers can obtain a car loan online and in person. In particular, there is no credit check in the auto title loan application process. Because not paying the loan means the lender can repossess your vehicle.
In order to approve you for a car title loan, most lenders require a unique title. This means that you have paid off the vehicle. However, some lenders may just require you to prove that you have equity in the vehicle.
Why Are Car Loans Risky?
With a car loan, you not only risk losing your car, but also getting caught in a debt cycle. If you are unable to repay the loan, the lender may allow you to “rollover” it. A rollover is when a lender allows you to keep the loan money for an additional 30 days but ensures that you have to pay another monthly fee.
Rollovers are fairly common. In June 2019 the Consumer Finance Protection Office (CFPB) surveyed consumers who had secured car loans in the past six months. It found that 83% of respondents still owed money on their loans.
The CFPB also reported that around 20% of borrowers experience redemption if their loans are not repaid in full. According to Forbes, auto title companies make most of their revenue by letting borrowers take out new loans to pay off existing ones. This cycle, in which small loans become long-term debt, also ensures the continuation of the business.
What are the pros and cons of auto title loans?
When considering taking out a car loan to deal with unexpected expenses, consider the pros and cons:
|Advantages of the auto title loan||Disadvantages of the auto title loan|
|No credit check means approval for borrowers
with bad credit
|Monthly payments can turn into long-term debt|
|You have access to quick cash||Your car could be repossessed|
|Late payments will not affect your creditworthiness||The interest rates are high compared to other options|
Car loans can be attractive to borrowers with poor credit ratings as most lenders do not conduct credit checks. In addition, if you default on a payment, it will not affect your creditworthiness. However, the quick access to cash with a car loan rarely justifies the high interest rates and the potential for losing a valuable asset.
Alternatives to the auto title loan
Since the data behind auto title loans is less than excellent, taking a different route is probably a smarter financial move. Here are some alternatives for specifying the car title:
- Pay advance: If you are in good standing with your employer, you may be able to get part of your salary early.
- friends and family: If you want to avoid a financial institution altogether, try speaking to friends and family to see if you can get a loan agreement with a payment plan.
- Credit cards: Credit cards have set limits and interest will be charged if you fail to pay your balance by the end of the billing cycle. Even so, credit cards have lower interest rates than auto loans.
- Personal Loans: These installment loans can be used for almost any financial need and are available through banks, credit unions, and online lenders. They often have repayment terms of one to five years and their interest rates are well below those of auto title loans.
Top Recommendations For Car Loans
Whether you are financing a car or using it as collateral, it is important to compare the options to make sure you are getting the best price. It is advisable to always read the terms and conditions of each loan and look for possible penalties. You can also use the online prequalification that many financial institutions offer.
FAQ: Auto Title Loans
How Much Title Loan Can I Get For My Car?
According to CFPB, the average auto title loan is around $ 1,000. The usual credit limit is between 25 and 50% of the car’s value.
How easy is it to get a car loan?
Getting a car title loan is pretty easy. The borrower fills out an application and lets the lender see the vehicle and its title. When ownership of the vehicle is clear and the lender agrees to the application, the borrower will hand over the property in exchange for a loan.
How do auto title loans work?
Auto title loans are small, short term loans with high interest rates. With a car title loan, a lender holds the title of your vehicle as collateral. If you fail to repay the loan, the lender has the right to repossess the vehicle.
Do Title Loans Affect Your Credit Score?
Most auto loans do not require a credit check. That means a lender is unlikely to report payments to credit bureaus as they can repossess the vehicle to settle the debt.