Everything You Need to Know About Car Title Loans

If you were to face a $400 emergency expense, would you be able to cover it with your own money? If you’re shaking your head, know that in 2019, a third of US adults were in the same boat. The COVID-19 pandemic made things even bleaker.

Granted, experts believe the economy will improve this 2021. However, millions of Americans are still strapped for cash. A third of US adults say they’ll be in “survival mode” this year.

If you’re one of those folks, you may be wondering if it’s a good idea to take out a car title loan. How do these loans even work, anyway, and what do you need to apply for one? What about their interest fees and repayment terms?

This guide will answer all those questions and more, so be sure to read on to find out if a title loan is a good option or not.

What Is a Car Title Loan?

Car title loans also go by the names “car title pawn,” “title pledge,” or “pink-slip loans.” Either way, these are short-term loans secured by the title of a vehicle. The vehicle title serves as the “collateral” for the loan.

Title loans are “short-term” loans because they usually have a contract term of 15 to 30 days. This means you need to pay the loan back within two to four weeks, depending on the indicated maturity date.

Title loans used to be “small loans,” as most lenders only issued loan amounts ranging from $100 to $5,000. However, some lenders now offer much more, seeing as the price of new vehicles has soared past $40,000. Some lenders even allow you to borrow up to $50,000, depending on the value of the vehicle you want to pawn.

Why Consider Taking Out a Title Loan?

Most banks prefer extending credit to borrowers with “good” to “exceptional” credit scores. These scores are within the range of 670 to 850.

The thing is, only about 69% of US adults have scores within that range. The rest have “subprime” scores that fall below 670.

Also, keep in mind that traditional lenders require hard credit history checks. These are the types of credit checks that hurt credit scores. So, the more bank loans you apply for, the lower your credit score can get.

All that can happen, and you may still end up getting rejected for a personal loan.

Since a car title loan is a secured type of loan, most title lenders don’t require high credit scores. They don’t perform credit checks, either. This means you can qualify for a title pawn even if you have a bad or poor credit score.

The entire application process for title loans also takes as little as 30 minutes. This means you can have the funds you need within the same hour you apply for the title loan.

What Do Title Lenders Need From You Then?

Since you’re using collateral to secure a loan, the first requirement is to have a clear car title. This means you shouldn’t have any outstanding lien on the vehicle. Your name should be on the title, too, as this proves your car ownership status.

Title lenders also require all borrowers to have a valid state driver’s license. They need to compare this with the information indicated on the vehicle title.

Another requirement is proof of income. If you’re an employee, you can use your most recent W2 form or 1099 form. Most lenders also accept recent pay stubs and the federal tax return form from the previous year.

If you are a self-employed borrower, you can use your most recent tax return form as proof of income. Some lenders may also require bank-issued statements or other financial documents.

You also need to provide proof of vehicle insurance, which should be valid and up-to-date. Some lenders also require borrowers to furnish a duplicate set of vehicle keys.

If you can meet all these requirements, you can proceed with the application. In most cases, you can start by filling out pawn car title application forms online. You can also do this at the physical brick-and-mortar office of the title lender.

How Much Can You Borrow?

This will depend on the value of your vehicle and your ability to repay the loan.

Suppose your car’s value is $10,000, but your income can only afford a $5,000 loan. In this case, you can expect the lender to loan you only up to $5,000.

How Much Should You Borrow?

Borrow only what you need and can afford to pay back, as title loans can have an average 30-day interest rate of 25%. For example, in Florida, pawnshops can legally charge up to 25% per month. So, if you borrow $1,000 for 30 days, your interest fees alone could reach $250.

That’s on top of the original $1,000 loan amount you borrowed. By the end of the 30-day loan term, you’d need to pay the lender $1,250 in full.

How Do Title Lenders Determine Vehicle Value?

When you apply for a title loan, you need to bring your vehicle to the lender. The lender will then assess and inspect your car to gauge its value. You’ll then receive a loan offer to which you have no obligation to agree.

Meaning, you can either push through with the loan or, if not, take it to other title lenders. This way, you can compare their offers to find out which one offers the best deal.

Do You Have to Leave Your Car With the Lender?

Some lenders allow borrowers to keep driving their vehicles throughout the loan term. However, they’ll hold on to your car title, which you can then retrieve once you’ve paid the loan in full.

Keep in mind that a title loan is a secured loan, so if you don’t pay back the loan, the lender can keep your car. Some lenders allow borrowers to renew their contract, though. However, you still need to make minimum required payments if you decide to renew a title loan term.

So, Should You Take Out a Car Title Loan?

If you need funds as soon as possible, a car title loan can help tide you over. However, be sure to borrow responsibly, as these loans come with high-interest rates. Borrow only an amount that you’re certain you can pay back within 15 to 30 days.

That way, you don’t have to keep renewing the term, which can make your loan cost even more.

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