Almost daily I see title loan places near me. For years I had no idea what these places were or what they did. Why do they have so many billboards and annoying advertising? That’s because they’re peddling what’s called a car title loan. But what exactly is it?
A car title loan is a lending practice wherein the borrower uses their car title as collateral. These loans tend to be short term in nature, such as a month long for example, and are meant to be used in situations when a short term influx of cash is needed.
Perhaps you’re looking for short term liquidity as well and you’re considering getting yourself a title loan. Or, maybe you’re trying to sell your car and you’re wondering how to sell a car with a loan. Regardless of your reasoning, it is important to know the ins and outs of auto title loans.
The Pros of Car Title Loans
Even though most of the positive things you’ll ever hear about title loans will come from a lender, there are some advantages to taking advantage of this loan process.
The main advantage of getting an auto title loan is the approval process. As with most loans, you will have your credit and income verified before any decision can be made. With title loans, the only consideration made regarding your approval is whether or not you have a clean and clear title for your car. If you do have a clean title, you’re one step closer to getting one of these loans.
Another part of the approval process is calculating how much equity you have in your car. If you owe more on the car than it’s worth, no lender would want to take it as collateral because it is quite literally worthless (worthLESS than the loan outstanding for it.) But if you do have equity in your car, the lender will use this to calculate how much they can loan you.
Lenders will likely offer you a percentage of your car’s equity in the way of a cash loan. Say your car is worth $10,000 and you still owe $4,000, the lender will offer you a loan against the $6,000 difference in your car’s worth and lien. If your loan offer was for 25% of your car’s equity amount, then the lender would offer you a $1,250 loan.
The advantages of taking a car title loan are few and frankly 99% of people would be better off avoiding them. But if you are truly in need of quick cash and have the equity in your car to back it up then a title loan may work for you.
It would make sense for someone needing cash now to get a title loan only if they are anticipating funds coming in to pay back the loan. If someone is waiting for a payment like a tax return that will replenish their funds, then it might make sense to take advantage of the title loan process.
The Cons of Car Title Loans
With any loan, there are a myriad of problems that can arise. Before even considering a car title loan, consult a financial professional so you are making decision that best fit your needs.
The first big downside to car title loans are the actual loan terms. These loans almost always come with high interest and a list of fees that will make your head spin.
You see, title lenders know that their customer base is solely people in need of immediate cash and who are willing to put ownership of their car on the line. Lenders often take advantage of these people’s desperation and stick them with loans that are very hard to pay back.
Knowing this ahead of time, the lenders anticipate the borrowers falling into a cycle of debt. Thus borrowers who can’t afford repayment are forced to refinance the loan with the same lender, often for an even greater expense. Plus, the car at risk of being repossessed the entire time.
Remember that these car title loan places don’t usually check credit or income, so they frequently wind up lending cash to people who can’t afford to repay. The borrowers applying for these loans generally have bad credit or little income, so lenders are more than aware of the likelihood of default. But since these borrowers have virtually no other options for a loan, the car title lenders are their only option.
In all, stay FAR FAR away from car title loans if you think you don’t have the means to repay. The last thing anyone wants is to be trapped in a cycle of debt where your car is at risk of repossession at each term.