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Title Loan
By Julia Kagan
Updated January 15 2021
Review by Thomas Brock
What is a Title Loan?
An entrepreneur’s title loan is an loan that requires an asset to serve as collateral. Title loans are very popular due to two key reasons. The first is that an applicant’s credit rating is not considered when determining eligibility to be eligible for the loan. In addition, due to the looser requirements for applications, a title loan is able to be approved quickly for amounts as low as $100.
Important Takeaways
A loan that requires an asset as collateral is known as an asset loan.
Title loans are well-known because they don’t take into consideration the credit score of the applicant, and they are approved very quickly.
The most common type of title loan is one that is a title car loan in which the vehicle itself is the asset put on the line as collateral.
Title loans are typically taken by people who need cash urgently or who are in financial trouble.
The cost of title loans are high and are considered to be a risky alternative to financing.
How does a Title Loan Work
The most common kind of title loan is one that is a vehicle title loan. In this case the potential borrower is required to own a car outright and sign that the car title is transferred to an auto loan firm. The loan company will loan up to 25% of the vehicle’s entire value and keep the car’s title as collateral in the event in the event of default.
Typical car title loan amount is $1,000 but they can be greater. The standard length of loan is 15 to 30 days but can be longer. It is possible to repay the title loan with a single payment, typically after one month, or repay the loan in installments over a long period of time. plan. If a borrower doesn’t pay back the title loan in accordance with the repayment plan, the car can be repossessed immediately by the auto loan title company. The loan company also has the option of permitting a person who is in default make interest-only payments over one month periods that effectively extend the loan amount indefinitely until the loan is paid.
Special Takes into Account
Title loans could be appealing for people with poor credit or with financial difficulties who require quick cash. However, there are exorbitant cost that are associated with title loans particularly auto title loans which should give borrowers pause.
Annual percentage rates (APR) on an average title car loan can be up to 300%, and is nearly always greater than 100% interest. The APR’s high rate can lead to an economic treadmill that borrowers can never catch up and make the loan’s principal payment. Because of this, auto title or car title lenders are sometimes called «predatory lenders» because they are known to target people in need of money in urgent situations.
A good example of a Title Loan
Consider, for instance the $500 title car loan that must be repaid within a one-month period and carries an APR of 240 percent. That comes out to 20%. With this arrangement the borrower is required to pay the title loan company $600 in interest and principal to pay back the debt. For individuals who need urgently to pay $500 to pay it off, paying an additional $100 in interest over a one-month period may result in financial difficulties.
You could also consider a car title loan that has to be repaid in monthly installments over 24 months, and has an annual percentage rate (APR) of 108%. In this case, a 24-month car title loan, with monthly compounding, will cost the lender $7,362.71 in interest on top of the initial $5,000 principalamount, for a total payoff amount of $12,362.71. This doesn’t even include costs.
Other Alternatives to Title Loans
While title loans could be an appealing option when going through financial difficulties, they often 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 title loans.
Some other options include credit cards, even though they carry high interest rates however, they’re not as high as those for title loans. Before taking on any more debt, however, an individual can renegotiate their current credit with their bank or credit card businesses. They may also ask for an extension on the amount of their debts with their creditors, and they may be willing to accept in the short-term. The option of taking out an unsecure personal loan is superior in comparison to secured loan which requires one to provide collateral. Although unsecured loans are more expensive in comparison to secured loans because of the higher risk for the lender, personal loans offer better rates than those offered for title loans.
When considering an unsecured loan It’s worth using a personal financial calculator to determine how an interest rate will influence the total amount of interest to be due at the conclusion period of loan.
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