When you're faced with an emergency and strapped for cash, you may be inclined to take the first loan you get. However, if you make a decision too quickly without weighing your option, you could lose money -- and maybe even property -- long term.
What You Need To Know About A Car Title Loan
Car title loans are specifically for consumers in need of quick cash. A title loan (also known as a fast auto loan, pink-slip loans, title pledge, title pawn) a car title loan is one way in which you can receive quick cash when you're in need of it, but chances are it's not your best one. Why? Let's take a look below.
You can only take out a car title loan if own a vehicle (with no lien), only owe a little, or have equity in it.
This small secured loan uses your car, truck, motorcycle, or other vehicles as collateral. The amount you receive is usually 25% to 85% of the car's BlueBook value -- anywhere from $100 to $5,500.
In order to secure this loan, your vehicle must have some equity -- aka the value minus any debt you owe on the asset. A car that is paid off or has equity within the loan is usually eligible for a car title loan.
You must show your lender the car title, a photo ID, information on your current monthly bills, and proof of insurance. You must also have verifiable employment and enough income to pay for your loan. If approved, you must give your car title to your lender to receive the loan. Once the loan is paid off, you can get the title back.
Car title loans come at a high cost.
Even though the loan process is quick and easy, there is still a catch. These loans come with high fees (such as origination and setup fees) and interest rates -- up to 25% of the loan amount per month plus any additional fees.
You will need to contact your lender directly to know approximately how much you can receive for a title loan.
You could lose your car if you don't repay the loan.
Your credit is generally not taken into consideration when determining your rates and fees, mainly since the lender places a lien on your title and your vehicle is used as collateral in the case you default on your loan.
If you're unable to repay the car title loan in full, your lender could repossess the car, sell it, and collect the loan funds. (Your lender may even require a set of keys or GPS installation in the case that they need to repossess your vehicle.) Along with losing your vehicle, you risk the extreme damage done to your credit by repossession.
In some cases in which you can't repay the loan, the lender may let you roll over your loan into a new one, but beware: you will be adding more fees and interest into your current amount, making it nearly impossible to pay it off by trapping you in a cycle of debt.
Consider the Alternatives
A car title loan can be risky so before you go to your nearest title lender, look for some other methods for quick funding with lower fees, interest, and risks.
You can find a personal loan catered towards your situation, whether you have good credit, fair credit, or bad credit. Direct lenders and lending networks can help match you with personal loans and peer-to-peer (P2P) loans.
If you're not prepared for high interest rates and fees with a bad credit personal loan, consider asking a trusted family member or friend to be a cosigner. Keep in mind that this means they will share responsibility for paying back the loan and that defaulting on it means both credit scores are impacted.
Cash-Out Refinance Loans
If you're on top of your car payments and your vehicle has equity, you may want to consider a cash-out refinance loan that pays out the current value of your car. This can help you pay off your current auto loan and keep anything that is left over. This new loan is paid back in a similar matter as your previous loan.
A payday alternative loan (or PAL) from a federal credit union is an alternative to expensive payday loans. If you are a member of a credit union for at least a month, you may qualify for a loan ranging from $200 to $1,000 which is eventually paid back in one to six months.
Fees and interest rates are on the lower side: an application fee of $20 and an interest rate that is capped at 28%.
Credit Card Cash Advance
If you have a credit card with available credit, you may be able to take a credit card cash advance. While the interest rates are lower than a car title loan, cash advance fees and interest rates are high -- as much as a 5% fee and interest rates around 27%.
Consider taking out a short-term traditional bank loan from your local bank or credit union. These are usually less expensive than title loans and those with subpar credit can use collateral to receive lower interest rates.
The Bottom Line
A car title loan is a risky loan that should only be used as a last-ditch effort for quick cash. Before you look for a title loan, do some research and consider your other options.
Want to learn more about improving your finances? Turn to our reputable services for help with credit repair, loan financing, and debt relief.
Do title loans impact my credit?
Taking out a title loan does not affect your credit in a positive or negative way. However, defaulting on your loan can cause your car to be repossessed by your lender, which can drastically damage your credit score.
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