For one reason or another, some people need fast access to alternative forms of credit from non-traditional lenders. Whether it’s to pay unexpected bills or expenses or to cover the costs of rent, these types of loans have proliferated in recent years.
There are many types of businesses on the market that provide access to short-term loans that are approved quickly and without many questions asked of the borrower.
Some of these businesses became notorious, especially after the 2008 economic downturn, for preying on vulnerable consumers.
Unfortunately, the loans offered by a lot of these businesses come with strings attached, including unreasonably high interest rates and fees, and aggressive collection tactics.
One such type of loan is a title loan.
What is a title loan?
A title loan is a short-term loan that is secured against your car. To receive your loan, you’ll need to give the lender the title (or ownership) of your car for a short period. Ownership is usually transferred to the lender for 30 days.
Title loans are often compared to payday loans because they are short term solutions and usually are quite expensive. Title loans are slightly cheaper than payday loans. Payday loans often have annual percentage rates or APRs of 1000 percent or more, whereas title loans will typically have an APR in the region of 300 percent (which is also very high).
Like with all financial products, there are risks and benefits associated with short-term loans. Risks and benefits should be carefully weighed and considered before committing to a title loan.
There are certain risks you’ll need to take into account before taking a title loan. Let’s take a look at these risks in more detail.
Title loans have very high interest rates.
Interest rates on title loans are generally extremely high. As discussed briefly above, on average the APR on title loans comes in at around 300%. This means that if you had a title loan for one year, you would pay back three times the amount of the loan in interest!
As title loans are short term loans, it’s unlikely that a borrower will end up paying 300% in interest. However, with an APR of 300 percent, the typical monthly interest rate for title loans is about 25 percent. This means that if you take out a loan for $1,000 for a term of 30 days, at the end of the 30 days you’ll be required to pay back $250 in interest plus the $1,000 of principal — and that’s before any fees are added.
Title loans usually have high fees.
In addition to the extremely high interest rates, borrowers pay on title loans, creditors tend to add additional fees to the service. This can prove incredibly costly for borrowers and could lead them down a path of a continuous debt cycle.
Many borrowers end up paying back more in fees and interest than the value of the loan itself. A 2015 study found that while the average title loan amounted to just $1,000, the average amount of fees paid on title loans was $1,200 per year. This is quite a concerning statistic and one that people should take into account before deciding to commit to taking out a title loan.
To protect yourself, it’s important to go through the lender’s terms and conditions before signing the loan agreement. Look carefully at the interest rate, the period of the loan, and any hidden fees. For example, some unscrupulous lenders may add fees for things such as the early payment of the loan.
You should know all of this information before signing any contracts. Even if you feel as though you are under financial pressure, do not rush into signing anything that you have not read carefully. This is something that gets borrowers into more financial difficulties in the long term.
The real risk of repossession.
Another thing that potential borrowers should take into account when considering a title loan is that if you fail to repay the loan the creditor may repossess your car. The essence of a title loan is that you transfer your title or ownership in your car to act as security for the loan.
The Consumer Financial Protection Bureau (CFPB) has reported that approximately 20 percent of people who take out title loans are unable to repay the loan on time or in full and therefore have their cars repossessed by the company providing the title loan. This amounts to one in five borrowers having their cars repossessed by title loan lenders. That’s an unfortunate and shockingly high figure.
The risk of compounding interest.
Others who are unable to repay their loans in full may apply to the creditor for a second loan. Where this occurs, the lender allows the loan to roll over (usually for another 30 days). This, however, is quite detrimental to the borrower as more interest and fees accrue.
For many borrowers, this could signal the beginning of an unending cycle of debt. If you do not have a guaranteed source of income which will cover the cost of the loan, plus the interest and fees accrued, seriously consider another option. Failure to repay the loan on time may plunge you further into financial hardship.
Securing the title on your car.
Once you have been approved for a loan, how a lot of lenders secure the title of the car appears to be quite intrusive.
For example, some lenders may take a copy of your keys as security, while others have been known to go as far as placing a GPS device on the borrower’s car!
These measures are taken by lenders so they are in a position to repossess your car if you fail to repay your loan.
What are the benefits of a title loan?
There are many reasons why a title loan might seem like an attractive option to some. Unfortunately for many people, traditional loans are just not available.
This might be because a person has a bad credit score or perhaps is not currently employed and therefore does not meet a credit institution’s criteria for lending. We’ll look at some of these reasons in more detail below.
Difficult access to credit.
Banks and other traditional lenders may not even consider providing you a loan if you’ve got a bad credit score. In some circumstances, if they do decide you’re eligible for a loan, it might be prohibitively expensive.
Unlike banks, many of the companies that provide title loans do not perform detailed credit checks. In fact, to be eligible for a title loan you just have to prove ownership of your car, along with providing other basic information (see below).
Additionally, car title loan lenders don’t require a person to prove that they are in full-time employment. This is in contrast to a lot of banks, who will require proof of a substantial and regular income.
This acts as a barrier to many individuals who are employed on an informal basis (for example those who might be on zero-hour contracts). This might be relevant to a lot of people. There are many people, especially young adults who are part of the so-called “gig economy”, where they are working part-time or on a freelance basis. Again, access to more traditional forms of credit may not always be an option for these individuals.
Similarly, people who are not currently in a position to work, such as the temporarily unemployed or those in receipt of disability benefit, may not have access to loans from banks. Title loans allow these individuals to apply for a loan, where they might otherwise be precluded.
A lot of lenders just require very basic information. In contrast to the reams of paperwork that some traditional lenders like banks and other credit providers require, companies that provide title loans ask for only a few pieces of personal information and documentation.
This usually includes presenting documents such as proof of address, a simple proof of identity (drivers’ license or government ID) and proof of some form of income to cover repayments. As mentioned previously, this income usually does not have to be from a full-time or regular employment.
As discussed above, many title loan lenders accept applications from individuals who are not employed. You do, however, need to provide proof of income, such as an unemployment or disability benefit to get approval for a title loan.
Quick approval process.
Sometimes people may find themselves in a precarious financial situation where they need access to money in a hurry. This may occur where they have unforeseen expenses, such as medical bills or repair costs. Generally, title loans are approved very quickly, sometimes within a matter of minutes, and the credit may be available to the borrower within 24 hours. This may suit a person who needs very quick access to credit.
To get access to credit with traditional lenders, the approval process may involve quite rigorous checks which take a significant amount of time. There’s a lot of paperwork involved and it usually takes a trip to the bank to make the application. In certain circumstances, following an application to a bank for a loan, it could take days or even weeks for a loan to be approved. Where quick access to money is required, then a title loan may appear to be the most viable and attractive short term option for a lot of people.
What is required to qualify for a title loan?
First of all, to qualify for a title loan, you’ll need to have a car. In most cases, the lender will require that you own the car outright. This means that if you still owe money on car repayments there is a chance that you may not qualify for a title loan.
The lender usually requires you to own the car fully, because as mentioned above, they may repossess your car where you fail to make the repayments on the title loan.
However, some lenders do not require that the borrower owns the car in full and will still allow you to apply for a loan if you still have some car repayments left to pay.
In addition to ownership, many lenders explicitly state that the car itself should be in good condition. The value of the loan that you are entitled to will depend on the condition of the car, as well as other factors, including the year, make and model of the vehicle.
A newer car in pristine condition will get you access to a greater amount of credit than an older car with visible scratches and dents.
If you have more than one car, you’ll have to decide which one you’ll provide as security for your loan. Several factors should be taken into consideration.
For example, the car which is of a higher value will probably entitle you to a bigger loan, because as mentioned above, the amount of the loan is usually based on the value of the car.
However, this might also have its drawbacks. If you do accept a bigger loan based on the value of your more expensive car, you’ll need to make sure that you’ll be in a position to meet the repayments.
Additionally, if you’re considering providing your less valuable car as security, you’ll need to think about whether the loan you’re offered meets your immediate needs (i.e. whether the loan amount is too small).
If the car is owned by more than one person, the other owner is required to submit their documents also.
Once you have taken all of the pros and cons of title loans into consideration, you should assess whether you will be in a position to repay the loan in full and on time. A lot of borrowers resort to applying for short term loans such a payday and title loans as a matter of pure financial desperation. Unfortunately, those who are in financial difficulty may often not see the wood from the trees and are unable to think or plan beyond their next bill or financial deadline.
However, this type of panic-induced behavior leads to further financial chaos. If you think you will be unable to repay the loan on time and in full, you should seriously reconsider your options. Keep in mind that the interest rates for title loans are very high. Even if the lender gives the option of extending the loan at the end of the initial period, the interest will continue to accrue and fees will build up.
Based on the example given above of a 25 percent interest rate and a loan of $1000, if your lender allows your loan repayment to roll over for a second month, you will end up paying $500 in interest. That’s already 50 percent the value of the initial loan in just 2 months! And remember, that figure is just interesting. It does not include additional fees.
Taking all of the above into account, anyone thinking about applying for a title loan should seriously consider and carefully weigh up the risks and benefits of title loans.