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Car title loans: What they are and how they work Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make better financial decisions by offering you interactive financial calculators and tools, publishing original and objective content. This allows you to conduct research and compare data for free and help you make financial decisions with confidence. Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The deals that are displayed on this website are provided by companies that pay us. This compensation may impact how and where products appear on the site, such as the order in which they be listed within the categories of listing and other categories, unless prohibited by law for our mortgage or home equity products, as well as other home lending products. This compensation, however, does affect the information we publish, or the reviews that you read on this site. We do not cover the vast array of companies or financial offerings that could be available to you. Barry Winiker/Getty Images
5 min read Published October 19, 2022
Writer: David McMillin Written by Contributing writer David McMillin is a contributing writer for Bankrate and writes about topics like credit cards, mortgages, banking, taxes and travel. David’s aim is to help readers figure out how to save more and stress less.
Written by Rhys Subitch Editor: Rhys Subitch Auto loans editor Rhys has been editing and writing for Bankrate from late 2021. They are committed to helping readers gain confidence to control their finances through providing precise, well-studied information that breaks down complicated topics into bite-sized pieces. The Bankrate guarantee
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We receive compensation for the placement of sponsored products and services, or when you click on certain hyperlinks on our site. So, this compensation can influence the manner, place and when products appear within listing categories and categories, unless it is prohibited by law. This is the case for our loan products, such as mortgages and home equity, and other home lending products. Other factors, such as our own proprietary website rules and whether a product is available within your region or within your personal credit score could also affect the way and place products are listed on this site. Although we try to offer a wide range offers, Bankrate does not include specific information on each credit or financial product or service. All loans are risky when they aren’t paid back promptly. However, a car title loan comes with a particular risky result if you don’t make your payments on time and the lender could take your car. Before you decide to take out the title loan it’s important to understand the potential disadvantages of using your car as collateral to borrow money. What are car title loans? A car title loan or “pink slip loan,” allows you to take out loans ranging from 25 percent to 50 percent of the worth of your vehicle in exchange for giving your lender their title of your car as collateral. These short-term loans typically start at $100 with repayment periods between 15 and 30 days. Title car loans are designed for those who have had credit problems in the past and require cash fast. Many lenders have minimal or no requirements for credit — some won’t even . The application process is usually straightforward, and, if it is approved, you can expect to receive funds within 24 hours later, often, even earlier. The ease of access also means that these loan products are accompanied by high interest rates. Certain states restrict the amount of interest lenders can charge but others do not have any restrictions. And in some states, lenders are barred from providing the car title loans to customers. If you reside in the state in which the use of car titles loans are permitted, you will generally need to apply for an loan. Some lenders provide these loans when your car is nearly paid off, but it isn’t as prevalent. How do titles loans operate? Title car loans are available in a variety of various types. There are loans that are one-payment loans, meaning the borrower has to pay the entire value of the loan together with the interest fee within the month or that is. They are repaid in the course of three or six months, depending upon the lender. Although the word “car” could be included in the title of the product however, the loans also can be offered for boats, motorcycles and recreational vehicles. You can apply online or in person, but you’ll need a physical location to show your vehicle in front of the lender. Be sure to provide the lender with a clear title, as well as a photo ID when applying for a title car loan. The lender may also require keys. The vehicle will remain in your possession during the repayment period until you fail to pay the loan. To demonstrate how these loans work, assume you own a car valued at $5,000, and you find yourself in an emergency situation and require $1,000. A title loan lets you borrow against your vehicle so you can access the money quickly. Like a mortgage, which utilizes the home’s equity as collateral the title loan uses your vehicle as collateral. In order to get the title of your vehicle back, the loan is to be paid in full, including the steep costs the lender charges for providing the money. These fees typically comprise an average monthly finance fee of 25 percent. This is equivalent to an APR at 300 percent. For a $1,000 loan, you’ll pay the additional amount of $250 for interest, even when the loan is paid back within 30 days. If you’re late in your payment and penalties for late payments are assessed then you could end up paying a penalty of $250. loan may cost quite a bit. Some lenders also charge processing, origination and document costs, which can drive the borrowing costs up even higher. There is also the possibility of having to obtain and pay for an emergency roadside assistance plan for your vehicle. The downsides of title loans While applying for an auto title loan may be easy however, it comes with serious costs and risks as per Graciela Aponte-Diaz, director for federal campaigns for the Center for Responsible Lending. “If you don’t repay the loan at the time it’s due it’s carried over into another cycle with more fees,” says Bruce McClary the senior vice president of communication at the National Foundation for Credit Counseling. “It can create a difficult situation for people who are already struggling to pay. It is the exact definition of the debt cycle.” The main drawback however, is the potential to lose your vehicle. If you’re unable to pay back the loan, the lender can take your vehicle and sell it to recoup the money. And this isn’t all that common. A study conducted by the revealed that 20% of people who get title loans have their vehicles confiscated. Even worse, “some car title lenders install a GPS device — nicknamed”kill switch”- that can prevent the car of the borrower from starting, using this practice to collect a loan or making it easier to seize the vehicle,” Aponte-Diaz adds. With the real danger of losing your primary source of transportation, it’s easy to see how a title loan can be stressful. Alternatives to title loans With all the serious disadvantages, McClary recommends reaching out to traditional banks and credit unions to identify less costly loan options. Also, you could use a credit card if you have one available to meet your short-term cash requirements. Even if you don’t have a bank account, have a poor credit score, or had financial issues in the past, it’s worth investigating all your alternatives. “It’s amazing how flexible these traditional lenders can be,” McClary says. “There are plenty of credit unions that are open to working with bankless customers.” Apply for an individual loan Although qualifying for a personal loan isn’t easy when you have bad credit, you may have options. Some online lenders you could be eligible for. If you’re a member of a credit union, you can also try explaining your situation to a banker. They may be able to approve an loan in light of the strength of your relationship and good banking background. Or you can request a relative or friend with a stable source of income as well as a good credit rating to apply with you , thereby increasing your chances of approval. Consider a payday alternative loan Payday alternative loans are a different, less expensive alternative to think about. They are available through a few credit unions, but you need to be a member in order to get access to these loan product. Loan amounts range between $200 and $2,000 payable over one to 12 months. The application fee is capped at $20 and you’ll pay no more than 28 percent of interest. This means that payday alternative loans cheaper than title loans and some bad credit personal loans. Make use of a credit card can also apply for credit card in the event that you have a dire financial emergency. Or you can take money through your credit card via the use of a . Be aware that the rate of interest for cash advances is usually greater than the rate you’ll pay for purchases — up to 30 percent variable. Additionally, there is no grace period. Interest will start accruing right away. Be prepared that you’ll have to cover an ATM fee for withdrawing funds. McClary is not a fan of adding credit card debt but believes it’s a better choice over the traditional title loan since you’re likely to pay far less in interest than you would for an auto title loan. The bottom line is that car title loans are a convenient alternative to get cash fast. However, the cost is typically too high for the risks involved, and you could end up in a far worse situation than before you took out the loan. Think about alternatives that are more affordable for credit card, loan for personal use, loan as well as a payday alternative loan, before settling on a title car loan. But if you’ve exhausted all your alternatives and you have to take a car title loan ensure you review the fine print. Title lenders need to present you with loan conditions in writing prior to signing. Federal law requires them to be honest and upfront regarding the total amount of the loan.
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Written by a contributing writer David McMillin is a contributing writer for Bankrate and covers topics like mortgages, credit cards tax, banking, and travel. David’s goal is to help readers figure out how to save more and stress less.
Written by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since the end of 2021. They are passionate about helping readers gain confidence to control their finances by providing precise, well-researched and well-documented facts that break down otherwise complex topics into manageable bites.
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