Car title loans have been around since the 1990’s. They provide a way for people with no or poor credit to secure a small loan. This is made possible by using the car as collateral; in other words, the car becomes a guarantee that the loan will be repaid. If the loan is not repaid, then the car can be taken to cover the rest of the debt. This is similar to how a mortgage or home equity line of credit works, but on a much smaller scale.
The process: where to start
Sometimes things don’t work out as we plan and we need some help getting back on our feet. A car title loan can provide anywhere from $250-$10,000, depending on the value of the vehicle and your need. And even though it is called a car title loan, almost any vehicle can be used as collateral—boat, RV, trailers, etc.
There are generally two ways that a person can go about getting a car title loan—online or in-person. Online is becoming a popular option because it is often more convenient than driving to a title loan location. When a person applies online they are required to fill out a form with their contact information and a representative will call them about getting the loan processed. In-person the process usually takes about 15-20 minutes.
The loan representative will need to gather information on the applicant and the vehicle itself, including an appraised value. Once this is done, if the loan is approved, clients get to drive off with cash in hand that day.
In order for a title loan to be approved, there are a few things that must be in place:
- The vehicle title must be clear and by the loan applicant. If there is anyone else listed on the title, they must be present to sign off on the application as well.
- The loan applicant must be 18 years of age or older.
- Proof of residency must be supplied in the form of utility bills with the applicant’s name on them (a copy of a rental agreement, or a cell phone bill, for example).
- The applicant must have a valid driver’s license and working landline or cellphone that they can be reached at.
- There are no credit checks, so even people with no credit or bad credit can be approved.
Car title loans are a business, and lenders are able to loan funds and make a profit through charging interest. Car title loans will often have a higher interest rate than vehicle financing or a mortgage because there is a higher risk of people defaulting on them.
The fine print
Once the loan has been approved, a lien will be placed on the vehicle. A lien is “the legal right of a creditor to sell the collateral property of a debtor who fails to meet the obligations of a loan contract” (Investopedia). This means that, until the lien is removed or “discharged”, the vehicle cannot be sold or traded. If the vehicle is damaged or destroyed due to a motor vehicle collision or other calamity, the vehicle’s owner is still responsible for repayment of the loan.
Depending on the size of the loan, repayment will be set over a pre-determined period of time and at a set amount. Late or missed payments may incur extra interest or other penalties, so it is important to make payments on time and in full. Once the loan is paid off, the lien will be removed and the vehicle’s title will be cleared.
The big R—repossession
For both vehicle owners and lenders alike, repossession is a worst-case scenario. For car owners, they lose the vehicle and may still find themselves responsible for payment of the loan, and for lenders it is time-consuming and expensive. If someone is having problems repaying a loan, many lenders would rather work with them to ensure repayment rather than repossession, but if payments are not coming in and the client is unresponsive, the only option left may be repossession.
Car title loans can be a great way to cover an unexpected shortfall, but it is important to know what you are getting into. Always ask questions and make sure that the payments are something that you can afford.
This article was written by Eugene. Q. Willis, a financial writer, according to whom, title loans are one of the quickest ways to get cash in an emergency.