The Basics of Auto Title Loans
Borrowing money is a serious matter which deserves your time and consideration. It doesn't matter whether you get a loan from a bank or decide to use a payday advance or auto title loan to get extra cash, taking on new credit is a big responsibility. You are making a legal commitment to repay the loan according to the terms and conditions of your loan agreement and if you fail to do so, the consequences can be severe and long-reaching.
Unfortunately, today's economic climate has made it more difficult for consumers with less-than-perfect credit to qualify for traditional loans offered by banks and credit unions. This has led to massive growth in the payday advance loan industry and in particular, to the popularity of auto title loans.
Auto title loans are classified as short-term loans. This means they have a very quick repayment period- usually 30 days. However, auto title loans differ from other types of payday advance loans because they are secured loans (a borrower's personal vehicle is required as collateral).
Most financial experts consider auto title loans a serious example of predatory lending. This is due to the fact that most title loans have extremely high rates along with excessive fees and other charges. Studies have found that auto title loan lenders frequently target low-income consumers who have poor credit scores and little or no money-management skills. Since no credit check is required, lenders often approve loans for consumers who they know do not have the necessary income or financial resources to successfully repay the loan.
Here are some advantages and disadvantages of using auto title loans to get quick access to emergency funds.
- There is very little paperwork required.
- The borrower usually receives the cash funds within one day. No long waiting periods to be approved and obtain the money.
- Lenders do not perform routine credit checks. Loan amounts are normally calculated on the value and condition of the vehicle (40%-50% of wholesale value).
- The borrower may still operate the vehicle while the loan is outstanding so there is no problem with getting to work and doing other everyday activities. However, the lender will require that you give them a set of keys to the vehicle along with the auto title until the loan is fully paid off.
- Lenders charge excessive fees and payment amounts for auto title loans.
- Auto title loans come with extremely high interest rates. If you are quoted an interest rate of 25%, this is the monthly rate. The APR will calculate to 300%!
- The possibility of losing your vehicle is very real. If you default on your loan (are unable to repay it) the lender has the legal right to repossess your vehicle and then sell it to recover the money which is owed.
- Auto title loans are generally small loans. Borrowers face an enormous risk (loss of vehicle) for such a small amount of cash. Lenders have almost no risk since auto title loans are secured by the borrower's personal collateral.
Be Cautious When Considering Auto Title Loans
No matter how you look at them, auto title loans are expensive. They also pose a great financial risk to the borrower. Before you sign on the dotted line, consider these facts:
- High interest rates are common with auto title loans. (300%-500% APRs are not unheard of)
- Loan amounts are usually given for around 50% of a vehicle's wholesale value.
- Consumer watchdog groups estimate that nearly one in eight auto title loan borrowers lose their vehicles because they are unable to repay the loan.
- Auto title loan lenders target low-income consumers who have bad credit scores, poor credit histories, and the inability to repay short-term loans.
- Researchers have found that the average borrower will take out 3-5 loans from a specific auto title loan lender. This suggests that most borrowers are not financially able to repay the original loan when it is due and must take out numerous extensions before successfully repaying the loan. This all adds up to skyrocketing interest payments and fees for the borrower and more profits for the lender.
Looking at Auto Title Loan Companies
If you are considering taking out an auto title loan to help you deal with an immediate financial need, here are some ideas to think about when you are researching companies:
- First and foremost, remember that auto title loans should be used for emergency financial situations only. Short-term loans are not designed as a solution to long-term debt problems. In fact, they can make a serious financial situation even worse.
- Be a responsible borrower. Ask for the least amount of money you truly need. Keep your risk as low as possible.
- Always try to negotiate the lowest possible interest rates. Not all auto title loan lenders will do this but it never hurts to ask.
- Compare different companies. There is a lot of competition in the auto title loan industry and this can sometimes work in the borrower's favor. Don't accept terms and conditions you know you can't live with.
- Go to consumer websites and look for auto title loan companies with high customer approval ratings.
What To Do If You Have Bad Credit
There's no getting around the fact that if you have bad credit, getting approved for a loan is a difficult task at best. Banks and credit unions have significantly tightened their lending requirements over the past few years leaving a large segment of consumers with few options when it comes to getting extra cash in a short amount of time.
Auto title loan lenders are very aware of this fact. They know that many of their customers have poor credit and are unable to qualify for a personal loan from a traditional lender. These lenders do not run credit checks on applicants because they know they are protected from loss by the collateral which borrowers pledge for the loan. So there is very little risk for auto title loan lenders when they approve a loan.
But borrowers face an enormous risk. In the worst-case scenario you will end up losing your vehicle. (think about getting to work, school, or anywhere else without your personal vehicle) Plus, you will be paying ridiculously high interest rates for the privilege of repaying the loan within four weeks!
Here is a brief description of a "typical" $500 car title loan with a 30% (monthly rate) and with a 30 day repayment period.
Including fees such as origination fee ($15), document fee ($5), processing fee ($5) and interest payment in the amount of $150, at the end of the thirty day repayment period, you would owe the principal ($500) plus these other fees and charges for a total amount of $675.
If you had to rollover this loan three times (which is typical), your charges after 4 months would be the same fees mentioned above (total $25), the principal amount of $500, and $600 in interest charges. You would be paying $1125 to borrow $500!
Many states regulate how many times a borrower may extend an auto title loan. If you are unable to fully repay the loan and can no longer get an extension, you will lose all the money you have paid up until this time plus have your vehicle repossessed. That's risking a lot for a $500 loan!
Before making a final decision, consider the following:
- Thoroughly investigate other borrowing options.
- Imagine no longer having your vehicle. (this is a real possibility)
- Seriously consider your personal circumstances.
- Look at your spending habits and make positive changes.
- If you are having serious debt problems, consider credit counseling. Do NOT add to your financial difficulties by taking on new debt.
How to Get Auto Title Loans Online
Each auto title loan website has its own application forms. Generally, this is the basic information which an applicant needs to submit:
- Personal Data- Name, address, contact phone numbers.
- Vehicle Information- Model, make, color, mileage and VIN.
- Auto Insurance Information- Lenders may require that you carry a certain amount of coverage until your loan is fully repaid.
Now you just submit the application and wait to be contacted by the lender. You will have to provide a clear title for your vehicle. Your vehicle must also be fully paid off and have no outstanding liens against it.
Auto title loans generally are given in amounts ranging from $100 to $5000. The entire process can take as little as one hour.