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A car title loan allows you to get cash by using your carвЂ™s title as collateral. These loans are based on your carвЂ™s value, not your credit, so you donвЂ™t need to go through traditional loan approval processes to get one. Though these loans may seem like an ideal solution to an emergency need for cash, their high-interest charges, and extremely short loan terms make them difficult to manage.
Car title loans are a quick and easy way to get cash in a hurry by using your vehicleвЂ™s title as collateral. These loans are based on your carвЂ™s value, not a credit check, so you donвЂ™t have to go through a traditional loan approval process to get one. Though these loans may seem like an ideal solution to an emergency need for cash, their high interest charges and extremely short loan terms make them difficult to manage. They also increase your risk of having your car repossessed.В
If you currently have a title loan, the best thing to do is to get out of it quickly. The following ideas may help you do that.
What Is a Car Title Loan?
A car title loan is a short-term secured loan that uses the title to a vehicle (either a car, truck, or motorcycle) as collateral. Some states donвЂ™t allow these loans at all. In states where they are allowed, these loans typically have a term of 30 days. At the end of the term, a single balloon payment of interest and principal is due. Loan terms vary by state, though, and can range from as few as 15 days to over a year. Depending on state regulations, the dollar amount of these loans usually ranges between $100 and $10,000. ItвЂ™s usually capped at 25% to 50% of the vehicle’s value.
Much like payday loans, car title loans are designed as a fast way to get cash for bills or emergencies. Because these loans are based on the vehicleвЂ™s value rather than your credit score, they are an appealing option if you have bad credit or no credit and need money quickly. Title loans are quick to apply for and get. An applicant can usually simply drive to a store providing title loans and leave with the loan proceeds in 15 to 45 minutes. Rolling over a previous title loan into a new loan takes even less time.
To qualify for a car title loan, the borrower must either own the vehicle outright or owe very little on it. There also can’t be any liens on the title. There is usually no credit check, but the title loan company must actually see the vehicle in person. Borrowers must also show their photo ID, proof of auto insurance, and sometimes proof of income. After the new loan is approved, the lender keeps the vehicle’s title until the loan, interest, and any document or processing fees are paid off.
Title Loan Interest Rates
Car title loans typically have a very high interest rate. Rates can be as high as 25% or more. This interest rate isnвЂ™t the same as the annual percentage rate (APR). Title loans have short terms, often only 15-30 days. So to get the APR, you have to multiply the interest rate over a yearвЂ™s time. For example, for an $800 loan at 25% interest over a 30-day term, the APR would be 25% x 12 months = 300%. Unfortunately, this extraordinarily high APR is normal for title loans.
If you can’t repay a title loan before the loan term ends, the lender may let you roll the loan over into a new loan. This will add even more interest and fees to your balance. To illustrate, let’s use the prior example of an $800 loan with 25% interest over an initial 30-day term. At 30 days, you would owe a total of $1,000. ThatвЂ™s the initial $800 loan plus the 25% interest, which amounts to $200. If you extended that loan for another month, at the end of the additional 30 days you would owe $200 more in interest, for a total balance of $1,200. The lender will probably add processing fees to your balance, too.
Title Loans and Repossession
If you become unable to pay a car title loan according to the loan agreement, the lender has the right to repossess and sell your vehicle just like a bank would. State law determines your redemption rights prior to a sale, how and when the lender can sell your vehicle, and whether you can be pursued in court for any loan balance that is left over after the sale (known as a deficiency balance). State law also determines whether a lender must return any surplus money to you if your vehicle sells for more than you owe.
A car title loan can get expensive very quickly, especially if you have to keep rolling it over into a new loan. These loans can easily make it impossible to pay back what you owe, which increases your risk of losing your car to repossession. The Consumer Financial Protection Bureau found that 1 out of 5 title loan sequences (where the borrower has to roll over the loan into a new loan) results in vehicle repossession.