Car title loans: What they are and how they work Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make better financial choices by offering you interactive tools and financial calculators, publishing original and objective content. This allows you to conduct your own research and compare information at no cost to help you make financial decisions with confidence. Bankrate has agreements with issuers such as, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The offers that appear on this site come from companies who pay us. This compensation may impact how and where products appear on this website, for example, for example, the order in which they may be listed within the categories of listing, except where prohibited by law. This applies to our mortgage home equity, mortgage and other home lending products. However, this compensation will have no impact on the information we publish, or the reviews you see on this site. We do not include the entire universe of businesses or financial deals that might be accessible to you. Barry Winiker/Getty Images
5 min read Published on 19 October, 2022.
Written by David McMillin Written by Contributing writer David McMillin is a contributing writer for Bankrate and writes about topics such as credit cards, mortgages banking, taxes, and travel. David's aim is to help readers understand how to save money and also stress less.
Editor: Rhys Subitch Editor: Rhys Subitch Auto loans Editor Rhys has been writing and editing for Bankrate since the end of 2021. They are committed to helping readers gain confidence to control their finances by providing concise, well-researched and informative information that breaks down complex topics into manageable bites. The Bankrate promises
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We are compensated in exchange for the placement of sponsored products and, services, or when you click on certain links posted on our website. So, this compensation can affect the way, location and in what order items appear in listing categories and categories, unless it is prohibited by law. This is the case for our credit, mortgage, and other home loan products. Other elements, like our own rules for our website and whether or not a product is offered in the area you reside in or is within your personal credit score could also affect the way and place products are listed on this website. While we strive to provide the most diverse selection of products, Bankrate does not include specific information on every credit or financial product or service. Every loans have risks when they aren't paid back on time. However, a car title loan comes with a particular risky consequence if you fail to make your payments on time: The lender may take your vehicle. If you are considering obtaining a title loan it is essential to be aware of the possible drawbacks of using your vehicle as collateral for borrowing money. Which are the car-title loans? Car title loan also known as a "pink slip loan," allows you to get a loan of anywhere between 25 percent to 50 percent of the value of your car in exchange to give the lender their title of your vehicle to use as collateral. These short-term loans generally begin at $100, with repayment times between 15 and 30 days. Car title loans cater to consumers with past credit challenges who need fast cash. Many lenders have minimal to no credit requirements -and some don't have any . The application process is usually simple, and if approved, you can expect to receive funds within 24 hours later -- often, even earlier. The ease of access also means these loan products come with steep rates of interest. Certain states limit the amount of the interest rates lenders can charge, while others have no restrictions. In some states, lenders are prohibited from offering auto title loans to customers. If you reside in the state that allows automobile title loans are allowed, then you will generally need to apply for a loan. Some lenders will offer these loans when your car is almost paid off, however this is less common. What is the way that the title loans work? Car title loans come in a couple of different varieties. Some are single-payment loans, meaning the borrower is required to pay for the entire value of the loan together with the interest fee within a month or that is. be paid back over 3 or 6 months, depending of the lender. While the term "car" may be in the name of the product, the loans also can be offered for boats, motorcycles and other recreational vehicles. You can apply either online or in person however, you'll have to go to a physical location to show your vehicle in front of the lender. Be sure to give the lender with an unbroken title as well as a photo ID when applying for a title loan. The lender may also require a set of keys. The car will be yours until the time of repayment until you fail to pay the loan. To show how these loans work, assume you own a car valued at $5,000 and find yourself in an emergency and need $1,000. A title loan allows you to use your vehicle as collateral so you can access the money quickly. Like a mortgage, which utilizes your home as collateral, a title loan uses your vehicle as collateral. To get the title to your car back the loan must be paid in full, including the steep fees the lender charges for the loan. These fees typically include an average monthly finance charge of 25 percent. This amounts to an annual percentage rate at 300 percent. If you take out a $1000 loan it will cost you an additional $250 in interest in the event that the loan is paid back within 30 days. If you're in default in your payment and payment penalties are applied and imposed, your loan could cost you quite a bit. Some lenders also charge origination, processing and document charges, driving the cost of borrowing more. There is also the possibility of having to pay for and obtain an insurance plan to cover roadside repairs for your vehicle. Downsides to title loans While getting an auto title loan may be easy however, it comes with high costs and risks, according to Graciela Aponte Diaz, director of federal campaigns at the Center for Responsible Lending. "If you can't pay back the loan in time the loan is rolled over to another cycle with more fees," says Bruce McClary, senior vice president of communications at the National Foundation for Credit Counseling. "It can create a difficult circumstance for those already struggling to repay. It's the specific definition of the cycle of debt." The most significant drawback, though, is the potential to lose your vehicle. If you can't repay the loan the lender can take your vehicle and sell it in order to recover their money. It's not all that uncommon. A study by the discovered that 20 percent of the people who take out title loans have their vehicles seized. And, even more alarmingly, "some car title lenders have the GPS device, dubbed"kill switch"which can stop the borrower's vehicle from beginning and use this to collect a debt or making it easier to take the vehicle," Aponte-Diaz adds. Because of the risk of losing your main means to travel, it's not difficult to see how a title loan can be stressful. Solutions to the title loans With all the serious disadvantages, McClary recommends reaching out to traditional banks and credit unions to find less expensive loans. Also, you could utilize a credit card when you have one to cover your cash-flow requirements. Even even if you don't have an account with a bank account, have a poor credit score, or been a victim of poor financial decisions before, you should consider the various options available. "It's interesting how flexible these traditional lenders can be," McClary says. "There are plenty of credit unions that are willing to work with unbanked customers." Apply for a personal loan Although qualifying for a personal loan isn't easy for those with bad credit, you may have choices. Some online lenders you could be eligible for. If you're a credit union member You can also try communicating your situation to an official at a bank. They may be able to approve an loan in light of the strength of your relationship as well as your financial background. Or you can request a relative or friend with a stable source of income as well as a good credit score to make an application with you as a , strengthening your chances of approval. Consider an payday alternative loan Payday alternative loans are a different, less expensive option to look into. They are available through a few credit unions, but you need to be a member of the institution to avail the loan product. The amount of loans ranges between $200 and $2,000 that are payable over a period of between one and 12 months. The cost of application is set at $20 and you'll pay no more than 28 percent interest. This makes payday alternative loans less expensive than car title loans and some bad credit personal loans. Utilize a credit card can also use credit card in the event that you're facing a serious financial emergency. Or you can pull funds from your credit card using a . Be aware that the rate of interest rate on cash advances tends to be more than what you pay for purchases -- up to 30 percent variable. Additionally, there is no grace period, and interest will begin accruing immediately. Be prepared to pay an ATM fee to withdraw funds. McClary rarely advises adding to credit card debt but says it's a better option over the traditional title loan since you'll likely pay lower interest rates than you would for the car title loan. The bottom line is that car title loans are a great option for getting fast cash. Still, the costs are generally far from the danger involved as you could be in a worse position than you were before taking your loan. Consider more affordable alternatives for credit card, loan for personal use, loan as well as a payday alternative loan before you settle on a title car loan. If you've exhausted your alternatives and you have to take the title of your car loan ensure you review the fine details. Title lenders need to present you with loan terms in writing before signing. Federal law requires that they be transparent and upfront regarding the total amount for the loan.
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Written by Contributing writer David McMillin is a contributing writer for Bankrate and covers topics like credit cards, mortgages, banking, taxes and travel. David's mission is to assist readers discover ways to save money and also stress less.
Editor: Rhys Subitch Edited by Auto loans Editor Rhys has been editing and writing for Bankrate since the end of 2021. They are enthusiastic about helping readers gain confidence to take control of their finances by providing clear, well-researched facts that break down complicated subjects into bite-sized pieces.
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