How Title Loans Work
Require financing for a quick purchase? Imagine that you have to buy equipment for your new business and you don’t have a great credit rating. You could consider taking a title loan. Title loans are popular because they’re easily approved regardless of the applicant’s credit score. They’re usually short-term and at variable interest rates, set by the lender. To understand more about how title loans work, let’s explore the concept in detail.
What exactly is a title loan?
A title loan is a loan that requires collateral in terms of an asset. This type of loan is popular for two major reasons. The first is that title loans don't qualify borrowers based on credit ratings, and the second is that they get approved very quickly even for amounts as small as $100.
What’s an example of a title loan?
The most common type of title loan is the car title loan. In this type of title loan, the borrower is expected to own a car as a prerequisite. The borrower is expected to hand over the title of the car as collateral to the lender in exchange for a loan of 25-30% of the car’s total value.
What are the payback terms for title loans?
Typically, car title loans amount to around $1000, although they could be higher. Borrowers have the choice of paying up the entire amount within a month or paying the amount in installments over a two-year period. In the event that a borrower defaults on a payment, the car is instantly repossessed by the loan company. The auto loan company also has the option of allowing borrowers to pay interest-only installment indefinitely until the entire loan amount is cleared.
The actual cost of a title loan
Title loans are popular among borrowers who have bad credit ratings and are in desperate need of quick cash. It’s this section of borrowers who don’t pause to consider the high costs associated with title loans. In actuality, the interest rate for title loans is usually at 100%. The Average Percentage Yield is typically over 300%. An Average Percentage Yield that high could cause borrowers to enter a never-ending routine of interest payment in which they are never able to pay off the principal amount.
Consider a car title loan of $1000 which needs to be repaid within a month. If the Annual Percentage Yield is 300%, the borrower has to pay the car loan company $1250 in principal along with interest to successfully clear the debt. For someone in need of $1000, paying an extra $250 may be too much of a struggle.
Pros and cons of car title loans
Let’s explore the advantages and disadvantages of car title loans to objectively understand the significance of applying for one.
- Car title loans have a short-approval process, unlike other loans. They’re beneficial to those looking for quick or emergency funding.
- Car title loans don’t depend on your credit score. This is great for people in financial trouble.
- While you have to sign-off your vehicle title to the lender, you don’t have to give up the vehicle. You can continue to use the vehicle for your needs.
- Car title loans typically have high interest rates higher than that of credit cards that sometimes exceed 100%.
- Car title loans are usually short-term and need to be repaid quickly. On failing to repay the loan, you will irreversibly lose your vehicle.
Best practices for title loans
When applying for title loans, there are certain best practices that you can use to get the best experience.
- Ensure that you understand and negotiate the best terms for your car title loan.
- Make sure you plan for a source of income that can help pay for your installments in advance.
- Consider other loan alternatives with lower interest rates and better payment terms.
Title loans are a great way to acquire quick funding for a purchase, especially when you have a bad credit rating. By planning your repayment in advance, you can achieve your financial goal and repay your title loan without any hiccups.