Weighing in the Benefits and Drawbacks of a Title Loan

When you first bought your sweet ride, you didn’t imagine you’d come to the point that you’d make it collateral to a loan. But life happens, and sometimes, you encounter problems that demand an immediate solution. Financial issues can put you under a lot of stress, whether it’s an emergency repair at home or you’re running short on cash to get you by day-to-day.

Sadly, sometimes you think the best solution is to put your car on the line in exchange for some quick financial relief. Say hello to title loans.

While some people don’t have as much faith that title loans can save them from their financial dilemma, there are those who’ve done it at least a few times. What you do is approach a title loans lender, have the car appraised, and then agree on the loan amount. You give up the title; you keep the car, you get the money, and you can solve your initial financial problem.

The only thing to worry about now is that you have to repay the loan or lose the car in the end.

Well, a lot of things go into consideration when you think of title loans, and it helps to know the pros and cons of this loan before diving in.

What is a title loan?

A title loan is a type of a secured loan wherein you’re able to borrow from a title lender in exchange for your car’s clean and clear title. It is one of the fastest ways to obtain quick cash when you can’t qualify for loans from mainstream lenders like banks and credit unions.

The loan amount depends on the appraised vehicle’s value. Most lenders are willing to lend around 25% to 50% of the vehicle’s value, but others have a ceiling amount regardless of how much the vehicle is worth.

But while title loans can provide you with quick cash relief, they also come at a hefty cost. They’re even more expensive than payday loans and banned in half of the states because they tend to trap borrowers into an endless cycle of debt. Typically, title loans come at an APR 260% to 300% and sometimes, borrowers need to give up their cars to get over their loans.

If you’re looking to address a financial woe and consider the title loan as one of your options, then it pays to know its pros and cons before applying for one.

How do title loans work?

Title loans work in a very straightforward way. If you’re interested in getting a title loan, you need to drive your car to a title loans lender and have it appraised. The lender will also ask you for some pertinent documents, such as the car’s title, an accomplished application form, and your identification. You’ll also need to provide the lender with an extra set of keys.

Most lenders don’t bother with proof of income or employment, and you won’t be asked to submit your credit report. You and the lender will agree on the loan amount. Most lenders would allow you to borrow up to half of the vehicle’s value, while others can only lend you up to their maximum amount. For example, some lender can give you up to $2,500 or $3,000 regardless of the vehicle’s value.

If you qualify, you will sign the loan agreement. Make sure to read every detail of the contract and ask for clarifications if necessary. You might be required to purchase additional insurance if you’re carrying only the basic one to protect the vehicle while you’re still repaying the loan. If everything is in order, you need to leave the car’s paperwork and set of keys with the lender, and you still get to drive the vehicle as usual. The loan amount will be deposited to you in a matter of a few hours or by the next business day. 

Loan terms can vary depending on who you ask. Some lenders follow the 30-day loan, wherein you need to repay the loan, along with its fees and interest in a lump sum by the end of the 30 days. There are also others that allow for installment payments. You keep paying the loan in smaller increments, month by month until you reach the end of the loan term (which could span for several months to over a year).

What happens if you don’t pay the loan on time?

The real problem with title loans arises when a borrower fails to pay on time. Two things could possibly happen:

• The lender rolls over the loan until you’re able to pay it off. You get to keep driving the car, but the interest will keep piling up as long as you don’t pay the loan off in full.
• The lender possesses the car. You have to give the car up if you’re unable to meet your loan dues. The lender may sell the car to recoup their losses.

According to Pew Charitable Trusts, the average loan amount for title loans is $1,000, with an APR of 300%. It isn’t unusual for borrowers to keep rolling their loan over because of the expensive APR, they end up owing over at least $1,200 in interests alone in one year.

The Consumer Financial Protection Bureau also found that first-time borrowers end up renewing their title loans at least four times before they’re free from it. And each time they roll the loan over, they incur more interests and charges.

Additionally, around 11% of the borrowers end up surrendering their cars because the loan has blown out of proportion, and it’s too difficult for them to pay up. Losing a vehicle can become an even bigger problem, especially if you rely on it to take you from home to work.

Pros and Cons of Title Loans

Title loans may or may not work to your advantage, depending on how you handle the debt. To help you decide whether it’s the right and best solution for your needs, here are the pros and cons of title loans.

Pros

1.  Easy to qualify – the title loan is one of the most accessible loans to be eligible for. The lenders’ primary requirement is that you need to own the car outright. It doesn’t matter if you poor or excellent credit score or if you have proof of income to show. Lenders would readily process your loan application as long as you’re able to submit the nominal documentation that they require and you agree on the loan amount based on the vehicle’s appraised value.

2.  It doesn’t affect your credit score – applying for title loans doesn’t count as “hard inquiry” on your credit report; therefore, it won’t affect your credit score. If you’re worried about having a bad credit score and how taking on new debts would affect your status, you can rest easy knowing title loans won’t make an impact on it.

3.  Quick cash relief – once approved for a title loan, getting the money is quick and easy. Since you won’t have to go through traditional credit checks and the required documentation is pretty minimal, then processing your loan application should be a fast and straightforward process. Depending on the lender, you’ll get the loan from the store or through your account within a few hours or the next business day.

4.  You can keep your car – you’ll have to temporarily give up the title of the car to the lender, but you can keep driving the vehicle throughout the loan term. As long as you can repay the loan, you should be able to use your car as usual.

Cons

1.  High APR – the most apparent drawback of title loans is their high APR. Title loans charge exorbitant fees, making them more expensive than some payday loans and even credit card cash advances. It is also this high-interest rate that keeps borrowers trapped in their loans for a long time, sometimes even resulting in them losing their cars.

2.  Losing your car – defaulting on your title loan can result in a very grave consequence: losing your car. If you borrow the amount of $1,000 and you fail to keep your end of the bargain, it means you’ve lost your car for a thousand bucks. But that’s not the end of it. Losing your car could be challenging for your lifestyle, especially if you drive to work. It is essential then to only apply for a title loan if you’re confident about your cash flow and you have enough wiggle room in your budget for the payments.

3.  Some lenders charge hidden fees – some lenders stack up their fees, so it’s almost impossible to get out of debt. You may be required to pay for documentation fees, processing fees, and even roadside assistance. Read the fine print of your contract to make sure you understand everything. Also, work only with reputable lenders so you don’t get ripped off with fees that will keep you in debt for a long time.

Alternatives to title loans

Car title loans may be able to give you some quick cash relief, but that doesn’t mean they need to be the first choice. You should try to keep title loans to the backburner until you’ve exhausted all the other possible solutions. You can stay away from the triple-digit interest rate, keep your car, and address your financial worries by exploring these other low-cost solutions.

Take a loan from family or friends. These are the first people who are willing to give you a hand when you need it the most and without an interest rate. If you’re expecting money or are confident that you can pay the loan back soon enough, you can ask help from your family and friends. You have to approach this with caution, though because financial mishaps can taint your relationships with them. If it helps to get things in order and put both parties at ease, create a contract about the loan.

Unsecured personal loan. An unsecured personal loan is a type of loan that does not need collateral (such as your vehicle). It is widely available in banks and credit unions, as well as third-party and online lenders. A personal loan allows you to borrow money and then pay it back in equal monthly installments, making it a more manageable loan option for most. Importantly, unsecured personal loans are anchored towards your creditworthiness and ability to repay. If you have great credit standing, then chances are you’ll get personal loans with very low interest. But even those who have poor credit score can get bad credit personal loans from other lenders.

Credit cards. Compared to title loans, credit cards have lower interest. If you’re spending the money on things that a credit card could pay for, then it’s better to forego the idea of a title loan. However, if you’ll be needing money as cash, you may also consider taking a credit card cash advance. Cash advances are quicker to obtain than title loans; they have lower APR and don’t need collateral. You just need to be careful about taking a cash advance though because you won’t be given a grace period as you would with regular purchases and interest applies the very day you made the advance.

Source money elsewhere. There are several ways to source money elsewhere without taking on debt. You can sell some of your things or take a side job. The benefit of trying to find funding through these methods is that you don’t subject yourself into debt, hence still keeping your finances intact. If you have a more challenging financial situation, consider getting professional financial help.

Is a title loan right for you?

The only person who can tell you whether title loans are right for you is also you. Title loans are heavily commercialized in states where they are allowed, but their ads don’t say a lot. They may tell you that you’ll get your loan quickly and easily, but they won’t tell you that you can lose your car eventually if you can’t pay up.

If you’re considering whether title loans are right for you, it helps to assess your financial well-being first and consider your real need for the money. A lot of people who take these types of loans are already in a bad financial shape that adding an extra payment is like rubbing salt into the wound. The loan may address your immediate financial need, but it doesn’t provide a lasting long-term solution.

Additionally, you need to assess your need for the loan. Are you borrowing to keep up with the Joneses or are you paying for something more relevant, like your kid’s tuition, a missed utility bill or emergency car repairs? Because title loans are costly, you want to keep them at bay as much as possible and only use them only when you’ve exhausted all other available methods.

Conclusion

It can be tempting to apply for a title loan when their ads say you can keep both the money and the car. But you have to approach these loans with caution. The financial industry doesn’t regard title loans as predatory loans for no good reason. These loans can keep you in an endless cycle of debt that can ruin you financially.

While we can’t always predict a financial emergency, it is always a good idea to look at the bigger picture. If you can address the problem from the root, then you can prevent it from re-occurring. Set goals for your money, set aside a portion of your income towards emergency, and learn how to budget. These are the basic rules for financial management, but if you apply them religiously and consistently, you’ll find yourself with more inner peace and lesser need for title loans.