When considering different forms of financing for expenses, there are a number of options to consider. One of the options that most borrowers consider at one point or another is a title loan. Learning everything there is to know about this loan type can help you determine if it’s the right financing option for your situation.
What is a Car Title Loan?
To those unfamiliar with this loan type, a car title loan is a short-term loan that provides a borrower with a small sum of money. It is a secured loan, meaning that collateral is required as a form of security on the loan. With a title loan, the collateral on the loan is the title of your vehicle. When you take out a title loan, the lender holds onto your title until you repay the loan in full. If you are unable to repay the loan, the lender holds onto the title permanently and takes possession of your vehicle.
Generally, a person can borrow somewhere in the range of 25%-50% of the value of their vehicle’s title. Therefore, if you have a vehicle that is worth $10,000, you may have access to borrow around $2,500-$5,000.
What is the Process of Borrowing a Title Loan?
Borrowing a title loan is a relatively simple process, which is why so many people consider using this type of loan:
Determining how much you need
First and foremost, a person needs to determine how much money they need to cover their expenses. This will allow a person to request only the exact amount of money they need, rather than applying for more funds than are necessary.
Reaching out to various lenders
After determining how much money you need, the second step in borrowing a title loan is contacting different lenders for prequalification and application. During this process, you will need documents such as proof of income, proof of vehicle ownership, and general personal information. You cannot take out a title loan without the lender seeing your vehicle, which is why proof of ownership is required. Compare different offers from lenders to see who provides the best deal.
Signing terms of the contract
Next, you will settle on the lender who provides you with the best loan terms. At this point, you will learn how much you will receive from the title loan, what your repayment period looks like, and the fees you will be charged. If this is an agreeable amount, you will sign a contract with the lender.
Repaying the loan
Once you have signed the contract with the lender, you will receive the lump sum of money that was agreed upon. Once you have received the funds, your repayments will begin. If your title loan has a tenor of multiple months, you will be responsible for monthly payments, but if the tenor is only thirty days then you will be responsible for a single payment.
Benefits of a Title Loan
There are a number of key benefits to taking out a title loan that make it an excellent decision for many. The most notable benefits include:
- Quick and easy access to cash
- Few requirements required to apply for the loan
- A short processing time
- You can still drive your vehicle while the loan is outstanding
- No guarantor is required in most cases
Drawbacks of a Title Loan
While all of the above benefits can make taking out a title loan seem like the right choice for you, there are a number of drawbacks to also keep in mind:
- Your vehicle is at risk to become repossessed by the lender if you fail to pay
- Loan amounts are not large, making it not ideal for larger expenses
- High fees equate to large APRs
Alternatives to a Title Loan
For those who don’t think a title loan is worth the cost, there are a number of alternatives to consider. Most notably, people consider taking out a personal loan which is an unsecured loan offering $1,000-$100,000 with interest rates ranging from 6%-36%. Additionally, many borrowers also consider taking out a home equity line of credit that offers a line of credit based on the current equity in your home.
Enhance your financial standpoint today
Title loans can be a good financing option for many individuals who are in the financial standpoint to take on the debt. Given the quick turnaround time associated with this loan, it’s best to only take out a title loan if you are certain you will have access to the funds very soon. Otherwise, the higher interest rate may quickly make a title loan more expensive than you were expecting.