In the world of short-term lending, the options are typically limited to payday loans and installment loans, but in recent years, another short-term lending alternative has grown in popularity: title loans. In some states, title lenders are solely set up in brick-and-mortar establishments, and borrowers must visit a location in person to take out a title loan.
What Are Auto Title Loans?
Title loans work by allowing the borrower to use their vehicle title as collateral when taking out a loan. These loans can help consumers who are not able to secure a loan elsewhere, giving them the ability to leverage something that they own outright in order to secure larger loan amounts that subprime borrowers typically don’t qualify for.
Loans are based on the value of the borrower’s vehicle, and generally, loans are funded at up to 40 percent of the car’s market value. Thus, title loans can be as little as $100 or as high as $10,000. According to Pew Charitable Trust, the average loan amount is $1,000. These loans are either repaid in one lump sump or in a series of installments, all of which is spelled out in the loan documentation and should be verbally explained by the lender’s representative.
Benefits of Title Loans
Like many other short-term loan options, title loans offer a quicker approval and funding process when compared to conventional lending institutions. Title loans usually involve more paperwork than other short-term loans, however, because they are backed by physical collateral. Because all forms are processed on site, this can significantly reduce processing times and facilitate on-the-spot approvals.
In the event of unexpected expenses, such as car repairs or medical bills, title loans can help consumers avoid financial disaster. It is estimated that at least 25 percent of title loan borrowers take out these loans to cover financial emergencies.
Unlike other property-based lenders, such as pawn shops, borrowers are not required to leave their property with the lender. Instead, the borrower simply makes payments on the loan until it is repaid in full. The borrower keeps their vehicle in their possession. When the loan is satisfied, the lender returns the paper title to the borrower.
What Borrowers Should Know
To take out an auto title loan, borrowers need to be aware of the approval criteria and how the lending process functions, as well as the terms and conditions of their loan. These conditions will vary from lender to lender, and all details should be clearly spelled out in the loan disclosure documents. If you have questions, don’t hesitate to ask.
Much like other short-term loans, auto title loans do not require borrowers to have perfect credit histories. In fact, many title lenders do not perform a credit check at all, which greatly increases the chance of approval for those with below-average credit scores.
Additionally, auto title lenders may not require proof of employment or regular income, because the loan is secured with the title to the borrower’s vehicle. Although most lenders do consider a borrower’s ability to repay the loan, some may weigh this factor less heavily than others. However, even if a lender doesn’t require a certain income level as a prerequisite for the loan, if you have no source of income, it may be difficult to adhere to the terms of the loan. Remember: defaulting on a title loan could result in the loss of your vehicle.
In addition, certain auto title lenders may require the installation of a GPS tracker in your vehicle during the loan period. This allows the lender to easily locate the vehicle in the event that you are unable to repay the loan. Other lenders may require you to give them a copy of your car key.
Regardless of what is required, be sure you understand the terms of your particular loan and do not afraid to ask questions before proceeding with the application. When you decide you want to apply for an auto title loan, call the lender or visit their website for information on what is needed to apply. Having all the necessary documents when you apply will save you time and will likely allow you to access your loan money that same day.
When faced with unexpected circumstances, it can seem as if there is nowhere to turn, but short-term loans can bridge the gap between your income and the unexpected. As with any loan product—short-term or otherwise—it is always wise to consider your available options and weigh the pros and cons of each. Being informed is the best way to ensure that you understand your responsibilities as a borrower, as well as the responsibilities of the lender.
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