Understanding Title Loans & How to Use them: A Guide

Every type of loan comes with certain risks if it is not repaid on time. However, there are some types that carry especially troubling consequences if you fail to meet your obligations - for example, a lender can take your vehicle if you decide on a car title loan. Despite this major drawback, people are still thinking about getting it - title loans were reportedly used by 3.7% of customers in 2023. Before deciding and getting a title loan, it's important for you to understand what it is and how to use it. That's why we will explain everything you need to know In this detailed guide.

What Is a Title Loan?

Before we go into the details, let's explain what exactly is title loan. A title loan is a secured loan where the borrower's assets are used as collateral. In general, you can use a deed or title to any asset to secure a loan. Among the many types of title loans, car title loans are the most common. Any time asked to define and explain a title loan, almost every lender will refer to a car title loan. These loans are often for shorter periods of time, often no more than 30 days. And because of this, even those with bad credit can apply for it, making it very comparable to payday loans. As long as you have collateral, your credit score and history are usually not so important.

How Do They Work?

Title loans are much like any other loan. You will need to find a lender that offers in-person or online car title loan services and apply for one. Having full ownership of your vehicle and a title free of liens is essential. With the application form, you'll also need to provide any valid ID (driver's license, for example), and proof of ownership/vehicle title. During the application, the lender will look at the vehicle's worth to find out how much money you can borrow. After the loan is approved, the next step is to surrender your title to the lender. Loan terms are usually around 30 days, as already mentioned, but some lenders offer longer periods. This leads to much lower interest rates and longer repayment periods for the borrower. When the loan period ends, you'll need to pay the whole amount of your loan, including interest rates. Your monthly interest payment can go up to 25%, but it can also be higher or lower - it all depends on the loan type.

How Much Do You Get?

The real question is how much you can get for a title loan, now that we know what it is. Your loan amount will be somewhere between 25% to 50% of the value of your car (or other vehicle). Higher loan amounts are available only for more valuable vehicles, particularly top-of-the-line models that are in almost flawless condition. The loan amount might be as little as $100, but the average begins at approximately $1,000. This means that you can't get a loan equal to 25% of your vehicle's value unless its value is at least $4,000. Loan amounts can range from $5,000 to $10,000, with some title loan lenders providing even higher sums for more expensive vehicles.

Benefits and Drawbacks

Speed and efficiency of the application process are the biggest benefits of title loans. The application process is usually very simple and can be completed in a few hours at most. In most cases, you can be approved and funded on the very same day you apply, making a title loan a popular option for those who need immediate financial help. And don't worry - there is very little chance that you'll be rejected since there are no credit score checks. Even if you have bad credit, you will still probably be accepted for a title loan since it is not based on your credit score. Additionally, it's a great option if you have no credit history.

However, it's important to note that title loans have some serious drawbacks. First of all, they are really expensive, with interest rates sometimes reaching 300% per year. That means an average of 25%interest charges per month. Take a $1,000 loan for example. With 25% interest per month, you'd have to pay back $1,250 at the end of 30 days - and that's without any additional fees that you will most likely have to pay.

These short-term loans are costly, but that's not the worst part. Lenders often provide options to renew or transfer loans into new loans if borrowers are not able to make full payments at the end of a loan term. The amount you already owe will be increased by additional fees and interest that come with this new loan, and you'll only have further difficulties as the costs continue to accumulate each month.

If you can't pay off the loan in full at the end of the loan term, you are at high risk of losing your vehicle. The lender has the right to repossess your vehicle regardless of whether you have been making partial payments or not, as long as you fail to meet the payment obligations outlined in your loan contract. Research shows that one out of every five loans result in the repossession of the vehicle.

Alternative Financing Options

We know that title loans seem like a good solution when going through financial difficulties. However, high interest rates and fees often just make your financial position worse. Thankfully, title loans aren't the only option. A person's credit card, for instance, can be a fast source of money if it isn't already maxed out. You should also consider options like requesting an extension from lenders, applying for an unsecured personal loan, using your tax refund, or borrowing money from family and friends.

For those times when you really need some extra cash, title loans might be a lifesaver. However, the borrower should always be cautious when taking it because of their reputation for charging predatory interest rates and hidden expenses.