When money's tight, and you need access to some quick cash, your options are often limited. A short term bank loan would be ideal, but those aren't always readily available – particularly if your credit history is less than perfect. You could pull a cash advance from one of your credit cards, but when times are tough there's a fairly good chance they've already been pushed to the limit. If you own your own vehicle, free and clear, a car title loan may be the answer to your problems.
However, title loans can be a tricky business, and you need to beware of the potential pitfalls if you are going to avoid getting in over your head. Yes, a car title loan can deliver some quick cash in an emergency, but it comes at a price.
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In some states a title loan is referred to as a title pawn, and that's a fairly big clue as to how these financial transactions work. Let's say you go to the local pawn shop to drum up some quick cash. You take in a couple of pieces of jewelry, which the pawn broker values according to the current state of the market. You're offered a cash loan against the value of the jewelry, which the pawn broker will hold as collateral, and then given a set schedule for repayment. You must repay the loan within that time frame, plus interest, or forfeit the jewelry. A car title loan works in much the same way.
With a car title loan, the lender will estimate the market value of your vehicle and give you a cash loan based on some fraction of what they believe it to be worth (often around half its wholesale value). The lending company will hold the title to your vehicle as collateral for your loan. You must repay the loan within the predetermined time frame, plus any interest, or the lender will take legal possession of your car, truck, or motorcycle. It is important to understand that these are short term loans, and they typically carry a very high interest rate, especially when compared against traditional auto loans. They can give you access to cash in a hurry, but if you fail to repay the loan on time, and in full, you are essentially selling your vehicle to the lending company at a loss.
Car title loans are available from independent lending companies like TitleMax, and can usually be obtained through pawn shops, cash advance centers, and so called ‘store front lenders‘. There is also a growing trend in online lending companies that specialize in title loans. CarsDirect Automotive Editor Armaan Almeida recently recommended USAutotitleloan.com, Carbuckscorp.com and Autopawn.com as online title loan providers. It's worth noting, however, that some states have made car title loans illegal, classing them as a form of predatory lending. So before you set your sights on a short term title loan you may have to do some research to see if they are an option in your state.
There are some benefits to applying for a car title loan, chief among them the ability to access some quick cash in an emergency. That being said, the advantages, though real, are somewhat limited and amount to a fairly short list.
While car title loans can be beneficial in an emergency, they do have some very definite disadvantages. As has already been mentioned, some states have banned title loans due to their predatory nature, and even those that allow them have issued consumer warnings informing borrowers that these types of loans can lead to financial hardship. Before you opt for a car title loan, you should understand the potential hazards.
If you own a vehicle, whether it's a car, truck or motorcycle, you may be eligible for a title loan. The amount of that loan will be determined by the current market value of the vehicle, and is typically limited to no more than 50% of its resale value. The process itself is relatively simple, and you will only need a few items to complete your application.
If the loan is approved, you will receive your cash and the lender will take position of your vehicle's title. This will be held as collateral against the full repayment of your loan, including all fees, taxes, and accumulated interest. Keep in mind, that these are short term loans, and in most cases you will have only 30 to 90 days to make full restitution.
While title loans can be an easy source of quick cash, it bears repeating that they come at a very high price. First, there are the exorbitant interest fees to consider. It's important to understand that car title lenders are not subject to the same regulations that govern banks and credit unions, and as such they have a fairly free hand when it comes to setting interest rates. Common-law usury statutes do not generally apply to car title lenders, so many of these companies push the interest on their loans to the absolute upper limits. Moreover, many of these lending companies work devilishly hard to disguise the exorbitant nature of their interest rates, quoting them in months as opposed to years. Let's look at a quick example:
If you decide to apply for a car title loan, pay close attention to the interest fees being offered. Perform some quick calculations to determine the actually annual interest rate before you agree to the contract.
Of course, the true cost of a car title loan doesn't end with the interest you pay. Most, if not all, lenders will charge additional fees, over and above the monthly or annual interest rate. These added charges can make a car title loan even more difficult to manage, often adding as much as 25% to the total cost of the transaction. These additional fees include, but are not limited to:
Before signing any agreement with a car title lender, be sure that you understand not only how the interest will be calculated, but also how any additional charges will effect the total cost of your loan. Remember, if you default on the loan the lender has the lawful right to repossess your vehicle, and you will have little, if any, legal recourse in the matter.
Car title loans do have their place, and in times of emergency they may appear to be the only viable option to scare up some much needed cash. That being said, they are far from ideal and should only be considered as a last resort. If you find yourself in a financial bind, and in need of some ready money, there are some alternatives to car title loans that may be able to deliver the short term cash you need without the additional risks. Before you decide to hock the family car, consider the following options:
Car title lenders exist because they serve a purpose, and fill a niche in the financial landscape. In extreme circumstances, a car title loan may be the only option available to access some quick cash. However, they are a form of predatory lending and as such should be viewed with caution.
Before you risk your vehicle on a short term loan, investigate any and all other alternatives first. If you ultimately decide that you need to apply for a car title loan, do so with care. Compare and contrast different lenders until you find the best deal. Read all of the fine print, and be certain that you fully understand your responsibilities as a borrower, as well as the costs and the risks inherent in the loan.
Finally, borrow only what you need to cover the current emergency, and devote all of your attention to repaying the loan on time and in full as per your contract. Otherwise, you risk the loss of your vehicle and further financial hardship in the future.