Sometimes an emergency will hit and you need cash fast but you have bad credit and banks don’t want to loan you money. A title loan may help you out. Title loans are short-term high interest loans that use your car as collateral to borrow money. Since the car title backs the loan, lenders often don’t check your credit. Since the car title backs the loan, lenders often don’t check your credit. If you fail to make payments, they can seize your car.
If you are considering a title loan, you need to understand how time sensitive they are. You could end up owing a lot of money. According to the Consumer Financial Protection Bureau, over 80% of consumers who took out title loans still owed money after six months later at a high interest rate creating a cycle of debt.
How does a title loan work?
If you own your car outright, you can apply for a title loan through any lender that offers them. You will need to show your lender the car’s title for proof of ownership and your license. If the lender approves your title loan, you’ll hand over your car title in exchange for the loan. Lenders determine the terms of the title loan, but often they loan you 25% to 50% of the value of the car for a term of 30 days.
Lenders require you to make payments on the principal that you borrowed, interest that is accruing and any fees charged. On average title loan lenders charge a 25% finance fee monthly on the loan which is an annual percentage rate of 300%! Missing a payment on a title loan is very costly.
When repayment doesn’t happen, lenders repossess the loan’s collateral which is a the car. Without a car, it can be very difficult to get to the job where you were earning the money to pay back the loan in the first place.
Advantages and disadvantages of title loans
While a title loan can help you get out of a tough financial spot. It is important to understand what you are getting into before you take out a title loan. There may be a better options for you. Below are some of the pros and cons of title loans.
Pros of title loans
- No credit check. The majority of title loan lenders don’t pull your credit to decide whether to approve the loan. This speeds up the process and allows people with bad credit to get a loan.
- Fast approval and access to funds. Since you aren’t waiting for a review of your credit, the lenders only take a few minutes to glance over your application and car. After approval, you gain access to the funds within a couple days and in some cases immediately.
Cons of title loans
- Possible debt trap. According to the Consumer Finance Protection Bureau, over half the title loans become a major debt burden for the borrowers which means they take out new loans to repay the old ones. This creates a cycle of debt that can keep you repaying the loan for years.
- High interest and fees. The APR for title loans is about 300% due to the high interest rates, finance charges, and additional fees. The longer that it takes to pay the loan back, the more interest you will owe.
- Short repayment terms. The repayment period for title loans on average is between 15 to 30 days. A traditional loan gives you from six months to three years to repay the loan based on how much you have borrowed and how long the lender will allow for repayment. A period of two weeks to a month doesn’t give you much time to earn the money to pay back the loan, so unless you have a paycheck on the way that will cover the loan, you will need to plan on finding extra income to help you pay off the loan.
- You may lose your transportation. The vehicle secures the car title loan, so repossession occurs when you fail to make payments on time. You must stay on top of your payments to avoid losing your car.
- Rollovers are expensive. If you can’t pay the loan when it is due, the lender allows for a rollover into a new loan instead of repossessing your car. Unfortunately, the new loan increases the fees and interest that you owe.
An alternative to title loans are you online personal installment loans. The online application is simple and approval is fast. If you are need money fast, Jora credit can help you out. Apply today!