Auto title loans, also referred to as car title loans, are a way to retrieve fast cash when you're in a financial crunch. According to the Federal Trade Commission (FTC), this kind of loan is "a small, short-term, high-rate loan that uses the clear title on your vehicle as collateral." These loans are an extremely costly form of credit, so you should have a thorough understanding of how they work before applying.
How Do Auto Title Loans Work?
When you apply for an auto title loan, the lender evaluates your car to determine what it's worth and uses this number to determine how large of a loan to extend. Some lenders will offer a loan for 100 percent of the vehicle's value while others will offer an amount anywhere from 25 to 50 percent, notes the FTC. Once the loan is extended, the lender will take possession of your vehicle's title until the loan is paid in full.
Benefits of Car Title Loans
There are a few advantages to taking out an auto title loan.
No Credit Check
Financial institutions, such as banks and credit unions, typically only loan money to borrowers who have good credit. By contrast, auto title loans are available for those with minimal or less than perfect credit since credit checks aren't required.
Lax Income Requirements
In most instances, the lender will not verify your income before extending an auto title loan.
Fast Access to Cash
You can expect to receive cash within 24 hours of submitting the required information and being approved.
Drawbacks of Car Title Loans
Unfortunately, there are also significant drawbacks to auto title loans.
Lack of Privacy
Since these loans are available to individuals with less than perfect credit, they pose a greater risk to lenders. To minimize their losses, lenders may install a GPS or starter interruption device so they can easily locate and seize the vehicle if you default on the loan, notes the FTC.
Exorbitant Interest Rates
Although these loans typically only span from 15 to 30 days, most are accompanied by exorbitant three-digit interest rates that average about 25 percent per month, which is equivalent to an APR of 300 percent, according to the FTC. In some instances, the interest rate could be much higher.
(25 percent x 12 months)
Total Cost of Loan
|30 days||300 percent||$3,125|
Fees, Fees and More Fees
In addition to paying significant interest, you should also expect to fork over a slew of administrative fees when repaying the loan. Fee amounts vary by lender.
- According to the FTC, fees may include processing, document, loan origination, lien and roadside service charges.
- You should also be prepared to pay a hefty late fee if payment is not remitted on time or within the grace period, which is determined by the lender.
Securing a Title Loan on Your Vehicle
Once you have a thorough understanding of how auto title loans work and the pros and cons associated with this form of credit, it's time to start exploring your options.
Auto Title Loan Providers
There are several auto title loan providers to choose among, including LoanMart, Ace Cash Express and AutoCashUSA. It's in your best interest to compare your offers from at least three lenders prior to signing on the dotted line.
The Application Process
Depending on the lender you select, you may be able to apply for an auto title loan from the comforts of your own home. Upon approval, you will need to visit their physical location and provide the following to finalize the transaction:
Identification (with a clear photo)
Original car title
Proof of insurance
Copy of vehicle key
This may seem like a no-brainer, but you will also need to bring the car to the premises. Your lender may require additional information, but these are just a few items you definitely want to have on hand to expedite the process.
What to Expect After Applying
Before executing the loan agreement, the lender will communicate your application status. If approved, you will be asked to come in and provide your documentation. In addition, you will be presented with the terms of your offer. On average, you should expect to pay 300 percent in interest alone, notes Bankrate.com.
What Happens If You Default
If you default on an auto title loan, your car could be repossessed, which is enough to make you think twice before securing an auto title loan. If you experience a financial hardship that prohibits you from repaying the auto title loan, be sure to notify your lender promptly to come with an alternative payment plan or payment arrangement. Of course, additional interest and fees will apply if you do, though that may be preferable to losing your vehicle.