How Do Title Loans Work?

How Do Title Loans Work?
Many people who want to access cash in an emergency want to know how car title loans work. Car title loans allow vehicle owners to access short-term, high interest rate loans using cars or trucks as collateral. Interest rates on car title loans are higher than traditional loans. People with less than perfect credit in search of fast cash are attracted to car title loans. Failure to pay a car title loan as agreed and on time can result in damage to the borrower’s credit score, vehicle repossession, or additional fees.

How Car Title Loans Work
Car title lenders ask the car owner and prospective borrower to fill out the loan application. The amount of the loan and interest rate quoted are typically based on the vehicle’s value. The lender typically offers at least 25 percent of the vehicle’s fair market value. A car worth $8,000 could qualify the owner for a $2,000 car title loan. The interest rate quoted in the car title loan is usually based at least in part on the borrower’s employment status. The average car title loan rate is approximately 25 percent.

Requesting a car title loan may not include a credit check, but some verify the borrower’s employment. The lender may request an auto appraisal and, if so, charges the borrower. Generally, the car title lender requires that the vehicle is owned free and clear by the borrower. The lender typically rejects the loan if another lien is found on the vehicle. Most title lenders allow the borrower to drive the vehicle, but the title remains on file with the lender until the loan funds and interest are repaid.

In some instances, the lender holds the title on the loan. If the borrower requests a longer loan term, the lender may actually transfer the title to the business name. Expenses to transfer the title will be charged to the borrower’s balance.

Car Loan Specifics
Borrowers should ask the car title lender about costs, fees, and all applicable loan terms before agreeing to hand over the car or truck title. The Truth in Lending Act demands that lenders provide specific information, such as finance charge, origination fees, annual percentage rate (APR), title charge, and other potential fees before the consumer signs the loan paperwork.

Most car title loans have short-term maturities or due dates. Some lenders agree to roll over the original loan if the borrower cannot pay off the original loan in the agreed upon time. The borrower is then required to pay more interest charges and fees. If the borrower does not repay the loan as agreed and doesn’t restructure the loan if more time is needed to repay, he or she could forfeit ownership of the vehicle. If the borrower needs the vehicle to get to and from work, a car title loan can mean an even worse financial position.

Lender Requirements
The car title lender is likely to ask the borrower for government-issued photo identification, proof of insurance, and keys. They may require the installation of a GPS monitor to know the car’s location at any point in time if repossession becomes necessary. Some lenders require the install of a device that prevents the borrower from driving the car if he or she fails to repay the loan.

Repossession
The Center for Responsible Lending reports that title loan companies with a repossession clause in the contract may repossess the vehicle without the need to obtain a court order if loan default happens. Some states force lenders that sell forfeited cars to pay the borrower the difference between loan balance and sales price. Title lenders may also provide the borrower with the option of returning the repossessed vehicle if the outstanding balance, interest and penalties are paid within a certain period. This option is usually quite costly and includes various repo-related charges.

Borrowers with short-term cash needs should understand the costs and risks associated with car title lenders. If at all possible, borrowers should find a less costly way to access short-term cash. Friends and family, an employer with whom the borrower has a good relationship, or a traditional overdraft account on bank checking can provide short-term funds at a lower cost.

However, many borrowers successfully borrow and repay short-term car title loans. In a true emergency, these loans can save the day.

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