In today’s touch economy, it’s not uncommon for consumers to find themselves short of cash. The tough economy has also meant tightening credit restrictions, with banks not as willing to lend money as they once were, especially for those with not the most stellar credit. One increasingly popular credit solution is through car title loans.
A car title loan, as the name implies, is a loan that is secured by the owner’s title of their vehicle. Sometimes this collateral even includes giving the lender a copy of the vehicle’s keys. These loans are typically designed for small, short-term loans, similar to payday loans.
Lenders issuing car title loans typically will only lend a borrower no more than 50 percent of the vehicle’s value. This ensures the loan is ‘over-secured’, for the lender. Payment arrangements vary from a series of short-term payments, to one balloon payment after a certain amount of time (typically one month). The borrower pays the loan amount plus interest. In instances where a balloon payment is due, if the borrower cannot pay the entire amount, the lender may charge the borrower a fee to roll the loan into the next month. In other instances, the terms of the car title payday loan are simply that if the borrower defaults on the loan the lender can repossess the vehicle and sell it.
Although online car title loans can be exactly what a consumer needs, in a cash pinch, there are several items to be aware of before taking out this type of poor credit car loan.
First, interest rates (or fees charged) for a car title loan is extremely high, often exceeding more than 300% APR. Because these are designed to be short-term loans, this still may be a good option for a consumer who is only temporarily short on cash. Consumers should be sure to do the math and know exactly how much they’ll be paying in interest rates and/or fees. It may be less expensive to take out a car title loan than to pay the late fee on rent, or vice versa.
Consumers should be certain they’ll be able to pay the loan per the terms of the note. If this is a monthly payment, typically the payment amounts are quite high, because the note is so short. Making sure this amount is really feasible for the budget will help minimize the chances that the vehicle will be repossessed, if the borrower defaults. If the loan is a balloon payment note, the consumer needs to make certain they will be able to make the full payment at the agreed upon date. If not, the borrower may find the vehicle repossessed, or may be subject to more fees to rollover the loan. Oftentimes borrowers find themselves rolling over their car title loan so many times, that the fees they pay end up being more than the amount that was borrowed in the first place.
Another important facet that consumers need to be aware of is that car title lenders are typically not as lenient as traditional lenders. The lender can repossess the vehicle securing the loan at anytime, should the borrower miss a payment. It’s common that car title lenders will repossess a vehicle immediately, even if the borrower is only one day late on a payment.
If the car is repossessed, the lender has the right to sell it and keep the FULL amount of the sale, not just the amount borrowed for the loan. As noted earlier, since the lender typically only lends 50 percent of the vehicle’s worth, at the most, this means the borrower has lost a significant amount of equity they had in the vehicle.
Lastly, consumers need to check the laws concerning loans for car titles, in their state. Car title loans are illegal in many states, and in other states, the APR has been capped at more reasonable rates. In states where car title loans are illegal, lenders may try to circumvent the law by calling their loans by other names, such as – automobile credit lines. You may also be interested in bad credit auto finance or car loans with bad credit.