Life is unpredictable, and one can find oneself in an emergency at any time. An unexpected injury, disease, or job loss can put an average American in severe financial peril. During these emergencies, most individuals turn to banks or credit unions to get a personal loan. However, getting one is a long, slow, and arduous process, unsuitable for immediate emergencies. Such borrowing also requires a good credit score, so if your credit history isn’t ideal, you must look for a different source. If you are in such a situation, despair not: a car title loan can help you. Read on to know more:
Understanding Car Title Loans
Car title loans are loans secured with your vehicle as collateral. These are intended for personal use only and are not for business purposes. If you do not pay your loan, the lender can sell your vehicle to recoup their expenses.
Your lender does not keep your car, as many mistakenly believe, but they do ask to possess your title: the document that serves as the proof of ownership of the vehicle. The lender will also ask for an extra set of keys for the car. You can also drive your car freely if you are not missing your monthly payments.
After you apply for a car title loan, the lender will assess your vehicle and determine how much loan amount you qualify for. You will also need to provide personal information and financial status to the lender to get the loan amount approved; without proof of income, it is difficult to get a car title loan. Once your request is approved, you will get the funds deposited to your bank account in 24 hours or less.
Remember that car title loans are marketed as short emergency loans for individuals who cannot get approved for traditional loans. You may not have an extended repayment duration, and the interest can be higher than personal loans. However, as car title loans are secured loans, you can expect a lower interest rate than other emergency loan options, like payday loans.
How Much Money Can You Borrow In a Car Title Loan?
Before you get a car title, check if you will get enough funds to cover your emergency. The amount you get depends upon the car’s model and make and its current condition. Lenders will require you to provide complete information about your car when you apply for the loan. After, the lender may ask to personally inspect the car or ask you to upload a few pictures of the vehicle from all sides.
Through personal inspection or the pictures, the lender will assess the fair market value of the car. However, you will not get all the amount as a loan. Typically, car title loans only let you borrow 25% to 50% of the car’s market value.
Remember that you can get as little as $100 in case of a poorly–maintained car and even $50,000 for a car in better condition. Most states have no minimum loan amount imposition, but some may restrict lenders from lending too little money.
Car Title Loan Requirements
Car title loans are marketed for people who cannot get traditional loans, so they have less stringent requirements. For example, the credit score requirements for car title loans are lax, and you may be eligible for a loan despite a bad credit history.
The apparent requirement for a car title loan is owning a car worth enough to finance your emergency. As with all loans and contracts, you must be at least 18 years old and legally able to enter a contract. You must also fill out an application form and provide the required documents. These documents include:
A Lien–Free Car Title
You must provide your car title to the lender to get approved. Your title includes all necessary details about your car, such as ownership history, model, make, year, odometer, and vehicle identification number (VIN). Remember that the car title must be in your name; if you are driving a relative’s car and haven’t transferred the title to your name, you will not be eligible for the loan.
Your title also must be lien-free or without any outstanding loans. If there are loans against your titles, you must pay them before you can get a car title loan. Typically, if you are financing your car through a lease or an auto loan, it is not lien-free until you gain full ownership of the vehicle.
As with all contracts, you must verify your identity when getting a car title loan. You can submit any government-issued ID for this purpose. Usually, lenders require the ID to have your picture as well. Your photo ID, driver’s license, or passport are all valid documents for getting a car title loan; just make sure they are not expired.
Proof of Income and Residency
Lenders only lend when they believe the borrower can return them their money. Your lender will require you to show proof of income or earnings. The document you must submit can differ according to your primary source of earnings, but some standard documents used for this purpose are tax returns, pay stubs, or bank statements. If your source of income is government-provided welfare, then you can include proof of government benefits.
As each state has different laws for loans, the lending policy depends upon your residence. So, the lender will ask for proof of address to verify that no state laws are broken. Similar to proof of income, the proof of residency can be any valid document that lists your address. Consider submitting rental or lease agreements, utility bills, or mortgage statements as proof of your address.
The Pros of Car Title Loans
There are several advantages of getting a car title loan, including:
No Credit Check
Your credit could be low for several reasons: you may not have enough transactions to determine a credit score, or you missed a few mortgage payments due to circumstances. A traditional loan scheme would make you ineligible for funding in such a scenario, but not car title loans.
However, it is vital to note that while credit history does not change your eligibility for the loan, lenders often do carry out soft credit checks. They do so to formulate loan terms so you may get a loan with lesser interest if your credit score is good. Additionally, successfully paying back a car title loan can improve your credit score, increasing your chances of getting better loan options next time.
Cheaper Than Other Loans
Car title loans are not the only loan option that is fast and does not check for credit scores. Other loans, like payday loans, are also available for people with bad credit and get you the funds instantaneously. However, such loans are usually more expensive than car title loans. A typical payday loan may charge interest of $15 to $20 on the borrowing of $100, equivalent to a 400% APR.
However, as car title loans are secured with your vehicle as collateral, they are less expensive and charge less interest. Car title loans also usually don’t have hidden fees, a problem all too common with other loans.
Car title loans are very convenient to take. Unlike traditional personal loans, where you may have to visit a bank several times, the application process for getting a car title loan is straightforward. Most car title loan lenders allow for online services with 24/7 access, and you may not have to leave your house even once during the entire process. For most companies, you just have to fill out an application form available on their website and then wait for their representative to contact you.
Traditional loans can take up to a week to get approved. If you are in dire need of funds, you might not have them available. However, the application process for car title loans is faster, and you can access funds sooner. Most car title loan providing services offer pre-approval services in which they determine your loan eligibility. After the pre-approval, you get your documents verified and get the funds. The entire process takes no more than a couple of days.
The Cons of Car Title Loans
While car title loans have several advantages in times of emergency, there are some risks and limitations, and you must be aware of them to make informed choices. The most significant disadvantages of these loans include:
Loss of Vehicle
The most obvious risk of car title loans is losing your car. If you default, your lender will seize your vehicle, and if the car’s value exceeds your outstanding debt, your lender can sue you in court. You may not intend to default, but you must plan for a scenario where you cannot pay the loan back. You must have a loan repayment plan in mind before you apply for a car title loan, and do not miss on repayments.
Higher Interest Rates
Loans not checking for credit history typically charge a high interest rate, and car title loans are no exception. However, while a car title loan has a higher interest rate than a personal loan, it is still a better option than other loans as it is secured with your car as collateral. Additionally, various factors determine your interest rate, like the loan amount, term length, credit score, and debt-to-income ratio.
Stricter Approval Requirements
You may think a car title loan is easy to get approved for as there is no credit check. However, the lender still wants to ensure that you can pay back the loan, so the approval requirements are pretty strict. Lenders will check for your employment history, and if you don’t earn enough from your current job or don’t have a steady stream of income, like a pension, they may not approve you.
Most short-term loans that do not rely on traditional financial institutions have a predatory lending problem. Some lenders may offer absurdly low loan amounts with high-interest rates that do not seem evident initially. However, a close look may reveal that the annual percentage rate goes as high as 300%. You cannot repay the loan and will have to roll it over into a new one, getting stuck in a cycle of debt until you inevitably lose your car.
Most Americans cannot afford an emergency; 56% cannot even cover a $1,000 emergency expense. Individuals with a bad credit history cannot get approved for a traditional loan either, so they have to rely on alternative funding sources such as a car title loan, in which the lender keeps their car’s title as collateral.
A car title loan requires you to submit an application form and give up your lien-free car title to the lender. Car title loans are fast, convenient, and cheap but may have high interest rates and stricter approval requirements. You may also lose your car if you cannot repay the loan or get stuck in a cycle of debt. It is essential that you thoroughly research your lender before getting into any kind of contract.