What is a Title Loan?

The term “title loan” refers to a type of loan that needs an asset to serve as collateral. Title loans are popular due to two main reasons. 

First, the applicant’s credit rating isn’t considered in determining eligibility to be approved for the loan. Second, because of less stringent requirements for the application that a title loan may be approved in a short time with amounts as low as $100.

Key TAKEAWAYS

  • A loan that needs an asset as collateral is referred to as the title loans.
  • They are trendy because they don’t consider the applicant’s credit score and because they are approved quickly.
  • The most well-known kind is a title loan vehicle title loan, in which the car is the asset that is used as collateral.
  • The majority of title loans are offered to those who require quick cash or are facing financial difficulty.
  • The prices for title loans can be astronomical and are considered to be an unsuitable financing option.

What is a Title Loan and How Does It Work

The most popular kind of Title loan would be a title loan. In this instance, the potential borrower must own a vehicle entirely and hand that the car title to an auto title company that lends loans. 

The loan company can lend as much as 25% of the vehicle’s value and will hold the title as collateral in the event of default.

The typical amount for car title loans is $1,000 but may be higher. The specific duration of the loans is between 15 and 30 days, but it can be longer. 

The borrower can pay back the title loans with one payment, usually after one month. Or, they can repay the loan over a long installment arrangement. If a borrower doesn’t pay the title loan according to the repayment contract, the title company could confiscate the car. 

The loan company can let the borrower who is in default make only interest-free payments for one month, which effectively rolls over the loan amount until the loan is repaid.

Special Beacons

Title loans might be attractive for those with bad credit or people in financial trouble who require quick cash. But, the high cost associated with these loans, specifically those secured by a car title, ought to give borrowers cause for concern.

Annual percentage rates (APR) for an average title loan for cars can reach 300% and is nearly always more significant than the 100 percent interest. The APR’s high rate can lead to an economic treadmill that borrowers cannot catch up or make the loan’s principal payment. 

This is why auto title or car title lenders are often referred to as “predatory lenders” because they are known to take advantage of people who require cash in times of need.

A Good Example of a Title Loan

Consider, for instance, an example of a 500 car title loan which must be paid back within the first month. It has An APR of percent. That’s an annual interest rate of 20 percent. 

The borrower has to pay the title lender $600 principal and interest to repay the loan in this arrangement. If you need to pay $500 urgently to pay $500 and need to pay an additional $100 of interest in one month can create financial hardships.

You could also consider a car title loan, which has to be paid back in installments of 24 months and has an annual percentage rate (APR) of 108 percent. 

In this instance, an unpaid 24-month title loan with monthly compounding would cost the lender $7,362.71 in interest in addition to the initial principal of $5,000, to a total amount of $12,362.71. This doesn’t even include costs.

Other Options to Title Loans

While title loans are an attractive option for people facing financial hardship, they can leave a person in a more difficult financial position than before because of the excessive interest rates and charges. The world of finance is vast, and there are plenty of alternatives to title loans.

Other options include credit cards. Although they come with high interest rates, they’re not as expensive as those for loans on the title. 

However, before taking on more debt, a person could renegotiate the terms of their existing balance through their banks or credit card businesses. 

It is also possible to seek an extension on the number of their debts with their creditors and may be willing to accept for a short time. 

An unsecured personal loan is preferred to secured loans, which requires the borrower to secure collateral. 

Although unsecured loans are more expensive in the rate of interest when compared with fast loans because of the greater risk for those lending them, personal loans have higher rates than loans offered in a title loans.

If you are considering an unsecured loan, you should use a personal financial calculator to understand how the interest rate affects the amount of interest paid when the loan is over.

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