A title loan is a short-term, high-interest loan that requires your car as collateral to borrow money. If you don’t have great credit and need to take out a loan, you might be scouring places that will accept your low credit score or sparse credit history. Title loan lenders don’t usually check your credit history, but there are other barriers you might face. A title loan is a secured loan that lets borrowers use their vehicle as collateral. Since your car secures the loan repayment, the lender can repossess your car if you don’t repay the loan on time. Title loans are usually short-term, high-interest loans that have few requirements, meaning if you have poor credit, you’ll still have an opportunity to qualify. Many times, credit scores and histories aren’t considered at all.
How Do Title Loans Work?
You can apply for a title loan through a lender that offers one as long as you own your vehicle outright and have a lien-free car title. During your application, you’ll need to show your lender your car, proof of ownership (your car title) and your license. If approved, you’ll hand over your car title in exchange for the loan. While the lender determines your loan terms, title loans typically have terms of 30 days, similar to payday loans. This means you’ll make one lump-sum payment at the end of your loan period. You’re required to make payments on the amount you borrowed, plus any interest and fees. Most lenders charge a monthly fee of 25% of the loan amount, which translates to an annual percentage rate (APR) of at least 300%. This is where title loans can become a headache. If you don’t repay your loan on time, you can lose your car because it serves as the collateral. So if you do choose to take out a title loan, be sure to pay on time so you don’t risk losing your asset.
How Much You Can Borrow With a Title Loan
Your loan limit is anywhere from 25% to 50% of the total value of the car, and the lender will examine your car to determine its worth. Some loans are as low as $100 while others are upwards of $10,000 or more.
When Should You Get a Title Loan?
According to the Consumer Financial Protection Bureau (CFPB), 20% of car title loan borrowers have their car seized when they can’t repay their loan back in full. Car title loan lenders make the majority of their business off of borrowers who continually take out new loans to cover their old ones. More than half of auto title loans become long-term debt and more than four-in-five auto loans are re-borrowed because borrowers can’t pay them off in full with one single payment. Because of this, you should look toward alternative financing methods before taking out a title loan. Alternative payday loans from credit unions, personal loans from online lenders, credit cards and even borrowing money from friends and family are all better options than potentially losing your vehicle.
Pros and Cons of Title Loans
Before you take out a title loan, review the pros and cons first. This can help you determine if it’s the right move for you.
Pros of Title Loans
• No credit check: Most title loans don’t require a credit check. This is good news if you need to borrow cash, have exhausted every other option available and don’t have great credit to qualify for a traditional loan.
• Quick approval and access to funds: Since there’s no credit check, it only takes a few minutes for lenders to review your application and vehicle. Once approved, you can receive funds almost immediately, or within a couple of days.
Cons of Title Loans
• Potential debt trap: The CFPB says more than half of auto title loans become debt burdens on borrowers. This means that borrowers continue to take out new loans to repay the old ones, carrying on a cycle of debt they can’t get out of. It’s harmful and dangerous, keeping you in debt for months after you’ve initially borrowed.
• Exorbitant interest and fees: APRs for title loans can be as much as 300%, due to interest rates, finance charges and other fees. These charges add up, only hurting your financial obligations more.
• Short repayment terms: Title loans typically require repayment within 15 to 30 days. Compare this to traditional loans, which typically have repayment terms of six months to three years, depending on how much you borrow. A 15- to 30-day repayment period doesn’t always give you enough time to find the funds to repay the loan you borrowed, plus the high APR.
• You could lose assets: Car title loans can put you in a horrible position: continue to rack up a huge debt burden or hand over your car. Stay on top of your payments to avoid the potential burdens title loans can bring.
Title Loan Alternatives
Almost every option available is most likely better than a title loan. Here are a few to explore if you’re in a tight spot and need the money.
Payday Alternative Loans
Payday alternative loans are small-dollar loans offered by federal credit unions (not all credit unions are federal). They’re similar to title loans, but don’t require collateral. These loans offer small amounts but have friendlier repayment terms, like making affordable monthly payments over the course of a few months. You can borrow anywhere from $200 to $1,000, plus interest rates at federal credit unions are typically capped at 18%. What’s more, credit unions tend to work with borrowers who don’t have great credit to find a solution that’s best for them. However, you must be a member of a credit union to get a payday alternative loan.
Personal loans usually are unsecured loans you can take out from a bank, credit union or online lender. You can use them for nearly anything you need and many offer fund disbursement as soon as the same day you’re approved. Even with poor credit, you might qualify for a personal loan. While personal loans charge interest, rates typically top out around 36%, significantly lower than a title loan. However, you’ll only receive the maximum rate on a personal loan if you have poor or damaged credit. Borrowers with good credit can qualify for rates below 10%. Lastly, repayment terms vary from two to seven years, letting you make affordable monthly payments until your loan is paid off.
When you apply for a credit card, you’re approved up to a certain credit limit, which you can use on an as-needed basis. You’re expected to repay your balance typically every 30 days, and you can reuse your available limit as you repay it. Any unpaid balances will begin to accrue interest; however, credit cards have much lower interest than title loans. If you can afford to repay your balance monthly, you’re essentially borrowing an interest-free loan. Some cards even offer no-interest financing periods for an extended period of time, like the first 12 months of your card ownership. Using an offer like this is a handy way to capitalize on inexpensive financing.
Friends and Family
Ask around your circle if you can borrow a little bit of cash to avoid falling into a title loan trap. Your loved ones aren’t likely to impose harsh interest rates the same way payday and title loan companies do. They’re also friendly enough to work on a repayment schedule that’s good for both of you. However, borrowing money from relatives can cause emotional and sometimes financial strain on your relationship. Take this route with caution and have a repayment plan in mind so everyone is happy with the result.
How To Get Out Of A Car Title Loan
If you already have a car title loan, it’s probably costing you a lot of money. But there are ways to get out of this type of loan, whether you negotiate the terms or take out a new, more affordable loan.
Pay off the loan
Depending on your financial situation, paying off the car title loan might not be possible but it does put the brakes on the borrowing cycle. First, contact the title loan lender and ask for the payoff amount. Then figure out where you can get the money to pay off the loan. Consider using these methods:
• Start a side gig to earn extra money.
• Ask for a salary advance from your employer.
• Sell a valuable item that you won’t miss.
Consider Debt Settlement
If you can’t afford the whole payoff amount, figure out what you can afford to pay as a lump sum. The lender may be willing to accept a lower amount, especially if you’ve already missed several payments. This method is called debt settlement. Once you agree to an amount, get the details in writing and make sure both parties sign the document so the lender can’t demand more money later. The downside is that your credit may take a hit. Although you’ve paid off the debt, it was for less than originally agreed upon. The lender may report the account to the credit bureaus as “settled.” This type of derogatory mark can remain on your credit reports for up to seven years. This may lower your credit score — but you won’t have to worry about being indebted to a title lender.
Negotiate The Loan Terms
Instead of settling the debt, you could negotiate more affordable loan terms. Ask for a lower interest rate, a lower monthly payment, a longer loan term or a combination of all three. Make sure you can afford the new terms, and get all details in writing. Keeping your account in good standing at affordable terms will help you pay off the debt and keep your credit healthy. You may choose to stop paying the title loan altogether, but consider the consequences of default. The lender will report missed payments to the credit bureaus and may eventually send your unpaid debt to collections. Both derogatory marks can remain on your credit reports for up to seven years and can negatively impact your credit scores. The lender may also repossess your vehicle. Some lenders require that borrowers install a GPS device on the car when they take out the loan. So if you default and try to hide the car, the lender can use the GPS to locate it and may charge you an extra fee. That leaves you with even less money, damaged credit and no transportation. In most states, lenders must tell you before they repossess your car. If you receive this notice, contact the lender immediately and try to negotiate with the lender or refinance the loan.
Refinancing A Car Title Loan
Another option is to apply for a new, lower-cost loan and use the funds to pay off the title loan. You’ll have to be sure you qualify for the new loan and check the loan terms to make sure it’s affordable. The new loan should come with a low fixed interest rate, lower monthly payments and enough time to repay the money. Look at different banks and credit unions for an auto loan or a personal loan. Also check your credit cards to see if you can take out a cash advance. If you can’t find affordable terms, try asking a friend or family member to either co-sign the loan or lend you the money. As long as the loan comes with better terms, it will be less expensive than constantly rolling your title loan over. And once you pay off the title loan, you’ll also get your title back.
Car title loans can also lead to a cycle of debt, the CFPB found. A vast majority of single-payment loan borrowers renew their car title loans multiple times, incurring fees each time. Just 12% of single-payment borrowers repay without renewing the loan, according to the CFPB. One-third of the remaining borrowers renewed their loans seven or more times. For a $1,000 loan, that would mean at least $1,750 in fees alone. The lender doesn't report your payments to the credit bureaus, so paying the loan does not build credit. If you don't pay, the lender likely won't send you to collections, hurting your credit — it can simply repossess your car to satisfy the debt.
Car Title Loan Alternatives
There are quick-cash options that cost you less and are less risky than a car title loan.
Before you take out a car title loan:
Pursue all other options: If none pan out, talk with your creditor to see if you can get more time, work out a payment plan or deal with the short-term financial consequences of not paying, such as late fees.
Can Title Loans Impact Your Credit?
Title loans may not have any impact on your credit at all, since lenders don't typically run your credit information or report your payments to the credit bureaus. That means on-time payments toward your title loan balance won't help you build credit or improve your credit scores. If you fall behind on your title loan, however, you can still face major consequences. Even if it's not reported to your credit file, you'll likely be charged late fees and your car could be repossessed and sold. Once you're behind on payments, the lender may offer to "roll over" your debt into a new loan as a solution, but this means paying more fees and interest, which makes it harder and harder to repay your full balance.
Title Loan Protections for Military Members
Predatory lenders, including car title lenders, often target their loans products at military service members. But if you're an active service member, you and certain members of your family could have special legal protections as a result of the Military Lending Act (MLA). The MLA restricts high-risk terms for certain kinds of financing, including title loans. If your lender has violated the MLA, your title loan could be rendered void. Here are some prohibited practices to look out for:
• A lender cannot require access to your bank account.
• You can't be required to pay your title loan by check.
• You can't be charged more than 36% APR.
Steer Clear of Predatory Lenders
Like paydays loans, title loans may seem like one of the only ways to get cash when you have credit problems. But even if you're in a pinch, it's important to explore all of your options before agreeing to put your car on the line. It's still possible to get a traditional personal loan even if you have bad credit. As more alternatives to bank and credit unions continue to enter the marketplace, your options are growing year by year. These alternatives include online lenders and peer-to-peer lending platforms, which often are more accepting of those with lower credit scores and have many advantages over auto title loans. Instead of relying mainly on your credit report, scores and income information to make a lending decision, lenders may use alternative credit data to help determine your creditworthiness, which could help you qualify for better terms or a lower interest rate. To avoid relying on predatory loans in the future, start working on your credit today. Along with paying bills on time and keeping your credit card balances low, you can use free credit monitoring to get familiar with what's in your credit file. Monitoring your report and score can help you identify areas for improvement and start building toward better credit right away.
Title Loan Lawyer
When you need a lawyer for a title loan, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506
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This article was originaly posted at https://www.ascentlawfirm.com/title-loans/