Unfortunately due to the upheaval caused by the coronavirus pandemic, a lot of people have found themselves in a precarious financial situation. We have recently seen the biggest surge in unemployment figures for many years.
A huge amount of people have either lost their jobs or have had their working hours and wages significantly reduced. Because of this, many people are unable to pay their usual bills or perhaps have incurred some unforeseen expenses such as a medical emergency.
This situation is even worse for those who may have a bad credit history, as their access to loans is significantly limited. However, over the last few years, various types of alternative lenders have emerged who exist to service this sector of the market. For borrowers who need access to short term credit quickly, there are several viable options. One of the most popular types of short term credit which is available to these types of borrowers is car title loans.
What is a car title loan?
Car title loans were first introduced into the lending market in the early 1990s as a solution for the increasing number of people who needed access to credit but were excluded from receiving traditional loans because of their negative credit history.
Car title loans, along with other alternative short term loans, became increasingly popular. This is mainly due to the debt crisis that has been occurring in the U.S., especially since the 2008 economic crisis and recession. In 2019, the amount of consumer debt in the U.S. was over 13.5 trillion dollars.
This amount of consumer debt is historically unprecedented. Obviously with this level of debt in the middle of an economic downturn, many millions of Americans have found themselves unable to pay their loans on time, or in some cases, not at all. As a result, the number of people with bad credit scores is currently extremely high. For this reason, loans like car title loans, which do not consider a bad credit score are in more demand than ever before.
A car title loan is a type of short term loan. A borrower who qualifies for a car title loan will use their car as collateral or security against the loan. This essentially means that the borrower will transfer their ownership interest to the lender until the loan is repaid. This type of loan, which uses the personal property of the borrower, can be quite risky. This is because there is always the possibility that the lender will repossess the car if the borrower defaults on the loan. We will look at this in more detail below.
Car Title Loans Are Suitable for Borrowers with Bad Credit
Somebody with a bad credit score may find that a car title loan is one of the most viable options if they require a short term loan. Unfortunately, if you have a bad credit score you will find it difficult to get a loan at a competitive rate, or even at all.
A person might have developed a bad credit score because they have failed to repay past debts or have consistently not managed to pay their bills on time. As mentioned above, millions of Americans currently find themselves in trouble regarding their debt. People may have received a bad credit score if they failed to pay credit card bills or their mortgage on time. There are also a lot of young adults who have defaulted on their student loans in recent years.
Most traditional financial institutions, such as retail banks, will look at a person’s credit score as a measure of how risky they are to lend to. If a person has a negative credit score, often banks will not even consider offering them a loan, as the risk of the person defaulting based on their history is too high. Other times, banks may offer individuals with a negative credit history a higher interest rate. Sometimes the high-interest rates offered by banks are prohibitively expensive.
Car Title Loans Are Approved Very Quickly
If you need quick access to a short-term cash solution, then a car title loan might be particularly attractive to you. The process to apply for a car title loan is generally extremely quick and easy.
Many lenders will allow the potential borrower to complete the application fully online. Where this is the case, the application process from start to finish may take under half an hour. A lot of lenders will be in a position to approve a car title loan in about 15 to 20 minutes. Additionally, borrowers are usually able to pick up their cash the next day or within 24 hours after the application has been approved.
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Other lenders might require that you come to their physical premises before being approved for a car title loan. This is a requirement if the lender wants to check the condition of your vehicle.
What You Need To Get Approved for a Car Title Loan
As mentioned above, car title loans are an attractive option for people with a bad credit history. This is because lenders are generally not concerned about the borrower’s credit score and in most instances will not perform any credit checks before approving the loan.
There are other necessary criteria that lenders require before they will give a loan to a borrower.
The first is that the borrower must own a car. In some cases, the lender will require that the borrower owns the car outright and not have any payments outstanding on their car. However, this is not required by all providers of car title loans. Some lenders will accept your application even if you have not made all of your car payments.
In many instances, lenders may also require some other paperwork. Often this might include:
- Documentation which proves your ownership of the car
- Some type of official identity document (such as a driver’s license or other government-issued ID)
- Proof of address, such as a utility bill
- Proof that the vehicle is properly insured
In addition to the documents listed above, lenders usually ask for proof that you have some type of income to cover repayment of the loan. Often, it is not necessary to prove that you have full-time or regular employment.
For many lenders, it is enough that you receive some type of income, including government assistance. This means that individuals who have lost their jobs or have reduced working hours may still be eligible for a car title loan. Unlike banks, who usually require borrowers to prove they are employed, a lot of car title loan providers are satisfied if a person collects unemployment or a disability benefit.
Some lenders will also take a copy of your car keys. In more extreme cases lenders have been known to place a tracking device, such as a GPS on the borrower’s car. This is a measure that some lenders will take to ensure that they’re able to repossess the car if the borrower fails to repay the loan. Sometimes, the lender’s device will be able to disable the borrower’s car remotely if they default.
What Is the Value of the Loan Based on?
As discussed previously, a borrower does not have to have a good credit history to secure a car title loan. Additionally, if you were applying for a car title loan you would not have to prove that you had full-time or even part-time employment. This is because the amount of the loan is based on the resale value of your vehicle.
Most lenders offer up to 50 percent of the resale value of the car. Other lenders may even offer loans of up to 70 percent of the resale value of the car.
Some lenders will take other things about your car into account. For example, certain lenders will adjust the amount of the loan they offer based on criteria such as the make, model, mileage, and year of your car.
Additionally, some lenders may require that you bring your car to their premises for inspection before they approve the loan. This is so they can check for things like scratches, marks, and other damage which might reduce the value of the car.
If you have more than one car, you’ll need to consider which you will use as collateral for the car title loan. The more expensive the car, the higher value of loan it will entitle you to. However, it may be more than you need or are even able to repay. Conversely, a cheaper car may not be valuable enough to release the value of the loan you need to cover your short term expenses.
In any case, discuss with the lender and they will be able to point you in the right direction in terms of which car you should use as security.
Again, you’ll need to proceed with caution and make sure you are being financially responsible. If you’re offered a big loan based purely on the value of your car, you need to make sure that you’ll be able to remake the payments.
Car Title Loans Are Usually More Attractive Than Payday Loans
Many people might consider a car title loan to be a better option than other types of short term loans, such as the notorious payday loan. Payday loans typically have higher interest rates than car title loans because they are unsecured. On the other hand, the interest rate for car title loans is usually lower than that for payday loans because the lender has collateral they can seize if the borrower is unable to repay the loan.
However, that being said, even though car title loans have lower interest rates than other short term loans, such as payday loans, the interest the borrower will have to pay is still relatively high when compared to what they would pay for a traditional bank loan.
Car title loans typically have annual percentage rates (APRs) of about 300 percent. What this means is that if the borrower owes the loan over one year, they would have to pay back three times the amount of principal in interest alone! This is certainly very high. However, because car title loans are designed to be short term loans, it is unlikely that a borrower will ever end up paying this amount.
Most lenders who provide title loans offer loans for around 30 days. The interest rate payable for this period at an APR of 300 percent amounts to about 25 percent. This is still a very high-interest rate to pay over such a short amount of time. For example, a borrower would end up paying $250 in interest on a loan of just $1000. If a borrower had a loan for $2000, they would have to pay $500 in interest.
Fees for Car Title Loans
Unfortunately, lenders also charge fees. This is in addition to the already high-interest rate applied to car title loans. A recent study found that the amount in fees paid by borrowers on car title loans often adds up to even more than the amount of the original loan. Sometimes, a borrower who signs up for a car title loan might not even be aware of some of the fees that could potentially accrue.
It’s incredibly important to read the terms and conditions of the loan agreement carefully before committing to taking out the loan. Many of the fees the lender charges are not obvious and declared upfront, and are often tucked away or hidden in the fine print of the terms and conditions.
If you are considering a car title loan you should take a significant amount of time to read the fine print. Failure to do this may cost you dearly in the long term. Knowing what charges are applicable may be the difference between being able to repay the loan on time and defaulting on your payment.
Potential Risks To Consider When Thinking About a Car Title Loan
There are several potential risks associated with car title loans. If considering taking out a title loan you’ll need to think about these risks carefully before you commit to anything.
Car title loans are a high risk for the borrower. One of the biggest risks if you’re considering a title loan is that you may lose ownership of your car. Statistics show that you have a 20 percent chance of losing your car. That’s right, as many as one in five borrowers end up losing their car due to failure to repay the loan.
A one in five chance that you may lose possession of your car is extremely high and therefore you should not enter into a car title loan agreement lightly. Many people find that it is the high rate of interest and additional fees they are unable to pay at the end of the term. Therefore, it is very important you know at the outset how much you will owe to the lender when your debt is due.
The Risk That Your Interest Rate Will Compound
If you are unable to repay your loan on time, lenders will sometimes allow the loan to roll over for an extended time (for example an additional 30 days). This is not particularly in the interest of the borrower. If the loan is extended it will mean that the borrower will end up paying a higher amount of interest and potentially high fees that might be applied for late payment of the debt.
For example, if a borrower has taken out a loan for the amount of $1000 at an interest rate of 25 percent, they will end up paying an extra $500 in interest at the end of the extended period. This is quite substantial and disproportionate considering the original amount of the loan was only $1000.
Sometimes the lender will allow the loan to roll over several times. Such an approach would be extremely risky for many borrowers. As discussed above, every time the loan rolls over, the amount of interest that is owed by the borrower is compounded. This is bad news for many borrowers and will inevitably lead to further financial hardship and difficulty for many people.
For a car title loan of $1000 with an interest rate of 25 percent, this would mean that if the borrower is still unable to repay after six months, they will owe more in interest than the original loan itself. Usually, this is the point of no return for many borrowers. If they find themselves in this amount of debt, they will often face the reality that their car will be subject to a repossession order.
Car title loans may be an attractive option for those who are unable to apply for more traditional loans due to their history of bad credit. If you find yourself in this situation and are thinking about applying for a title loan you need to consider your options very carefully before doing so.
While car title loans may seem like a better option than other short term loans, such as payday loans, due to lower interest rates, keep in mind that you could potentially end up losing your car if you’re not in a position to repay the loan in full when required. As shown above, this scenario, unfortunately, becomes a reality for many borrowers, with as many as one in five losing ownership of their cars because they have defaulted on their loans.
To avoid this situation, people considering a car title loan should weigh the risks along with the benefits. Always make sure that you carefully read the terms and conditions presented by the lender. Take the interest rate and all additional fees into account when calculating the final amount you will have to pay. The objective of this is to ensure that you will have enough money to cover the repayment amount in full and on time. If you are unsure whether you will be in a position to repay the loan, strongly consider an alternative financing option.