What exactly are car title loans? It is a short-term loan where the borrower’s car is held as collateral against the debt. People who resort to some car title loans usually do not meet the qualifications for other loans and turn to them for quick and convenient cash.
Wondering how car title loans work? The process is fairly simple and straightforward. The borrower will bring the vehicle and some necessary supporting documents including photo ID, income statement, proof of insurance, etc to the lender. Most of the title loan application process can be completed online but lenders often still need to take a look at the car’s physical condition as well as go through the paperwork to complete the process. The lending institution then gives the borrower the funds while retaining the title to the vehicle. Loan values are generally between 25-50% of the car’s present cash value. As part of the loan, borrowers are required to repay the loan, plus interest and additional lender fees, within a specified time period which is usually 30 days. Once the debt has been fully paid off, the borrower then reclaims the title and ownership of the car.
Car title loans are usually associated with exorbitant interest rates and are notorious for being predatory in nature. They usually allow lending to borrowers who do not have good credit scores which results in a cycle of debt. Not every state allows car title loan practices and some lenders even require additional steps like installing GPS trackers in the car to reduce the lender’s risk.
Rates and Fees
As mentioned earlier, car title loans are much more costly than ordinary bank loans. The exact interest rates are dependent on the lending institutions, but in states where interest rates are not capped, the interest rates are set at 30% per month. This translates to an annual rate of 360%. Explaining this in monetary terms, this means that someone who borrows $1000 will end up needing to repay $1300 at the end of the typical 30 days repayment period to avoid defaulting on the payment.
On top of the interest rates, lenders will also charge additional fees, usually within the range of $25 to $30. In cases where the state does not regulate car title loans, lenders can also charge a range of fees for other things like origination fees, key fees, document fees, processing fees or other fees. All the fees can add up quickly and total to an extra 20% to 25% premium on top of the loan and high interest rates. Some of these fees are also hidden by lenders and it can be hard to determine what are the total fees you owe upfront when calculating the total amount you have to pay for the loans.
To gain approval for a car title loan and get the cash, there are various documents that a borrower must present to complete the necessary paperwork and application process. In most cases, the borrower must hold ownership of the car outright. Additional documents including the following may also be required:
- Proof of ownership: Original title vehicle that proves sole ownership to the vehicle.
- Proof of residency: This can be in the form of utility bills or other documentation that matches the name on the title to the car.
- Identification: Government-issued, photographic ID that matches the name on the title to the car.
- Insurance: Proof of vehicle insurance.
- Vehicle Registration: Current vehicle registration
- Income Statement: Any recent pay stubs, income statements or documentation that proves the ability to repay the loan.
- Keys: Working copies of the vehicle’s keys.
- References: Names, phone numbers, addresses and contact information of at least two valid references that can support your application for the loans.
After talking so much about car title loans, let us look at an example to understand how it truly works. Beatrice has just lost her job recently and is struggling financially. She is having a hard time making ends meet and paying for her rent. She is looking for a quick solution in the short-term that will bring her cash upfront. She wants to borrow using her car as collateral, taking a car title loan against her vehicle. Her car is currently valued in the market at $2500, and the lending institution agrees to give her a car title loan for 50% of the car’s value at $1250.
To apply, Beatrice needs to submit some supporting documents including a proof of title to show her ownership of the car. She also needs to submit additional documentation like a valid verification ID, proof of insurance, income statement, etc. This is specified by the lending institution. She remembers that the interest rate was stated to be 20% for a 30-day repayment period for the loan. However, she assumed that the interest rate was set for an annual rate when the true annualized interest rate (APR) is actually at 240%. This is very high and not something that Beatrice would have accepted if she had known.
At the end of the 30 days, Beatrice has to make a payment of $1500, much more than the estimated $1270 that she thought she would have to pay. Beatrice continues to struggle financially and with her current financial straits, she cannot come up with the additional $230 and is forced to forfeit the title and ownership to her car.
In a Nutshell
If you are considering taking a car title loan, you need to own a vehicle outright and understand the consequences of the loan including the high potential cost of the loan with all its related fees and interest rates. You also have to make sure that you have a reasonable way to access cash to make the repayment for the loan within the given period of time. If you do not have a clear payment plan to repay the debt, a car title loan can end up being an overall loss as you end up ‘selling’ your vehicle away for half or less than half of its value.