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Title Loan
By Julia Kagan
Updated January 15, 2021
Reviewed by Thomas Brock
What is a Title Loan?
The term «title» refers to a loan is a loan that needs an asset to serve as collateral. Title loans are extremely popular because of two primary reasons. First, a borrower’s credit score isn’t considered when determining eligibility in order to get the loan. In addition, due to the looser requirements for applications, a title loan can be approved very quickly for amounts as low as $100.
Important Takeaways
A loan that needs an asset as collateral is known as an asset loan.
Title loans are popular because they do not consider the credit score of the applicant, and also because they can be approved quickly.
The most popular kind of title loan is a car title loan in which the vehicle itself is the asset set up as collateral.
Title loans are typically taken by people who need cash urgently or in financial difficulty.
The cost for title loans are high and are considered to be a poor alternative to financing.
How does a Title Loan Work
The most commonly used type of title loan is the auto title loan. In this scenario the potential borrower is legally required to own a car in full and then sign that the car title is transferred to an auto loan Title company. The loan company can lend as much as 25% of car’s entire value and keep the car’s title as collateral in the event of default.
A typical car title loan amounts are $1000 but they can be higher. The typical duration of the loan is 15-30 days, but it can be extended. Borrowers can repay the car title loan by making a single payment generally after one month, or pay back the loan on a multi-year installment arrangement. If a borrower doesn’t repay the title loan in accordance with the repayment contract the car could be taken away immediately at the request of the loan the title firm. The loan company also has the option of letting a borrower in default pay interest-only for one-month periods that effectively extend the loan amount for a period of time until the loan is paid.
Special Considerations
Title loans could be appealing for those with poor credit or with financial difficulties who require urgent cash. However, there are exorbitant costs that are associated with title loans and, in particular, auto title loans, that should give borrowers pause.
Annual percentage rates (APR) on an average title car loan can be up to 300%, and is nearly always higher than 100% interest. The high APR can cause a financial treadmill where borrowers cannot catch up and pay down the loan’s principal. This is why car title or auto title lenders are often referred to as «predatory lenders» due to the fact that they target people in need of money in urgent situations.
Example of a Title Loan
Consider, for instance, a $500 title car loan that is to be paid back in a single month period and carries An APR of percent. This amounts to a monthly rate of 20%. In these terms the borrower has to pay the title loan company $600 in interest and principal to pay back the debt. If you need to pay urgently to pay $500 to pay it off, paying an additional $100 in interest within a one-month period may create financial hardships.
Consider a $5,000 car title loan that must be repaid in monthly installments over 24 months, and has an annual percentage rate (APR) of 108%. In this instance the 24-month car title loan with monthly compounding, will cost the lender $7,362.71 in interest charges in addition to the initial $5,000 principalamount, for a total payoff amount of $12,362.71. And this doesn’t include costs.
Other Options to Title Loans
Though the title loans can be a tempting alternative when faced with difficult times, they can leave a person in worse financial situation than they were in before, due to the excessive interest rates and charges. The world of finance is vast and there are many better alternatives to the title loans.
Other options include credit cards. Although they have high interest rates but they’re not as high as those for title loans. Before taking on any more debt, however, an individual can renegotiate their current debt with their credit card or bank firms. They can also often ask for an extension on their debts from their creditors, and they may be willing to agree in the short-term. A personal loan is preferential to secured loan which requires one to secure collateral. Though loans that are unsecured loans are more expensive in comparison to secured loans due to the increased risk to the lender personal loans have lower rates than those offered for title loans.
If you’re considering an unsecure loan it’s important to use an individual financial calculator to see just what the interest rate will impact the amount of interest that is due at the conclusion of the loan.
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