If you faced a sudden expense of $400, would you have enough cash to cover it?
Well, if you’re like 40% of U.S. adults, you likely don’t have the cash to deal with the emergency expense.
That’s right. Four in 10 Americans don’t have enough saved up to cover such expenses. That’s why 5% of them say they’d have to take out some type of loan.
The question is, are there even loans that will give you quick access to emergency funds?
Yes, one of which is a title loan.
Before you apply for one though, you should first learn how title loans work. This way, you can determine if such loans are your best options, and if they are, what you should do to secure one.
Ready to learn all about these fast-approval loans? Then let’s dive right into it!
What Are Title Loans?
A title loan is a type of secured loan, wherein the collateral required is the title of an asset or property. Since there’s a security against the loan, lenders take on fewer risks. This is why they have more relaxed requirements compared to banks and credit unions.
For instance, most title credit finance companies don’t consider a borrower’s credit rating. Whereas traditional lenders look at credit scores first and foremost when qualifying applicants. This explains why bad credit scores were the reason 32% of loan applicants got denied in 2017.
So, for the 33% of Americans who have “fair” or “very poor” FICO scores, a title loan would be easier to obtain.
Also, since title loans have looser requirements, applications can get approved much faster. In most cases, applicants receive the loan money on the same day that they apply. The lender only needs to verify the legitimacy of the documents given by the applicant.
What Can You Use the Money For?
Unlike some types of loans, such as equipment loans, you can use the money from a title loan for anything. You can use it to stock up on groceries, pay your utility bills, or for house repairs. You can use it to pay off another loan that’s almost due to avoid late payment fees.
However, be careful with your spending, as title loans are more expensive than other loans. Consider taking out a title loan only if you’re in dire need of funds, such as in cases of emergencies.
How Title Loans Work: Which Titles Work and Which Ones Don’t
So, how does a title loan work?
Title loans allow you to borrow money in exchange for the title of an asset, such as a car title. How much you can borrow depends on the current value of your vehicle. This can range from $100 to $5,000 or more.
While car title loans are the most common type of title loans, you can also use other vehicle titles. These include those for vans, trucks, tractors, RVs, boats, and ATVs.
What’s important is to have a clear title, so it should be without levies or liens. You should have complete ownership of the vehicle, and that there’s no outstanding loan on it.
Let’s say you want to apply for a car title loan. When you bought your car, you did so through a car loan or a dealership financing program.
If you still owe something to the auto loan lender or dealership, then your car still has a levy or lien on it. But if you’ve completely paid off your auto loan, then you have a clear title. In this case, you can apply worry-free for a car title loan.
You can also check out this page containing the ultimate guide for auto title loans for even more info.
The Title Loan Application Process and Requirements
Most auto title companies require applicants to bring the vehicle to their office. This allows lenders to inspect and determine the vehicle’s condition. Most lenders prefer vehicles that are less than 10 years old, but older ones may still qualify.
Next, the lender would ask for the clear title, which should be under the applicant’s name. If there’s more than one name in the title, that person should be present during the application. The other owner should also agree to and sign the loan contract.
A valid driver’s license, social security ID, and proof of auto insurance are also required. In some states, automobile title companies also require up-to-date vehicle registration stickers.
To prove that you can pay back the lender, provide them with proof of employment or income. Employees can submit a Proof of Income Letter or their most recent pay stubs. For self-employed applicants, tax and bank statements will suffice.
What Happens Next?
Once the lender approves the application, they will keep the title in exchange for the loan funds. Most title companies do direct deposits or bank transfers, while some use checks. Either way, the borrower will get the funds right after getting approved.
Lenders keep the title, but borrowers retain full access to their vehicles. Yes, you can still use your car, van, or truck, even with a title loan on it!
Paying Back Title Loans
Title loans are short-term loans, with most having a one-month repayment term. Some auto title companies offering larger loan amounts offer longer terms though.
With one-month title loans, the repayment includes the entire principal, plus interest. The borrower pays this back in one lump sum or “balloon” payment.
With larger loans, the lender may spread the repayment over a course of a few months. They may also allow the borrower to make one or two payments every month.
It’s important to make timely payments, otherwise, the lender can “repossess” the vehicle. Remember, the title serves as the security against the loan. As such, defaulting on the loan transfers the vehicle’s ownership to the lender.
They can then sell off the vehicle to recover the unpaid loan.
Reducing Your Risks
One study found that 26.6% of loan applicants didn’t do any research on their loans at all. This is one of the biggest and costliest mistakes that you should avoid.
Especially if you’re planning to take out a title loan. These loans can be helpful for emergencies, but they can also get expensive if you don’t do your homework on them.
So, don’t let the stress of unexpected expenses force you to agree to the first title loan offer you get. You may be in dire need of quick funds, but you should still research your loan options. Otherwise, you may end up agreeing to a loan that you can’t pay back on time.
To reduce your risks of non-payment and title loss, here are some tips you should keep in mind.
Confirm How Much the Actual Cost of the Loan Is
The true cost of the loan includes the principal, interest, and other fees.
For example, the lender offers you a loan amount of $1,000. In exchange, you’d pay a 20% interest rate and a service fee of $50. If the term is only one month, then the actual cost of the loan would be $1,250.
If you can pay this back on or before the due date, then great. But if you can’t, a longer-term loan may be a smarter choice.
Pay Attention to All the Fees
A title loan that has the lowest interest rate doesn’t automatically make it the cheapest. There may be other fees that can make it more expensive. Origination fees, transaction fees, or “online service fees” can all raise the cost of the loan.
Remember: There’s More Than One Lender
And their interest rates and other fees can vary widely. That’s why you should get a quote from at least three of them. Compare the actual costs of their offers, and settle for the least expensive one.
Check Your State and Local Laws
States that permit car title loans have their own laws and restrictions. For example, Texas title lenders must indicate that there are no prepayment penalties. Also, the state requires all title lenders to carry a lender’s license and registration.
Title lending companies that fail to abide by these laws are committing an offense. These offenses are punishable by law and may lead to penalties and even suspension.
That said, be sure you’re also aware of your rights as a borrower before taking out a loan. And make certain that you obtain a title loan only from a licensed and registered lender.
Smart Borrowing Habits Can Make Title Loans Easier to Manage
Now that you know how title loans work, you can make an informed decision on whether it’s right for your needs. If you do decide to take out a loan against your vehicle’s title, be sure to keep our tips in mind.
That way, you can be a smart borrower and avoid facing higher-than-normal title loan fees and costs. You’ll have an easier time paying back your debt and you won’t have to worry about losing your vehicle.
Ready for more guides like this that can help you keep your finances in check? Then be sure to check out the rest of the posts in our Financial archives!
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