in Personal Finance

How Do Car Title Loans Work | Explained In Detail And Easy Terms

What Is A Title Loan?

Title loans, car title loans or auto loans whatever you may call it are loans which are taken by borrowers keep their vehicle as a collateral. This loan has to be repaid by the borrower within a period of 30 days at the stipulated interest rate. This financial concept developed in America and was widely used during the 2008 recession by people in utter need of liquid money.

How Do These Title Loans Actually Function?

A borrower will approach a title loan lender in his state and negotiate with him on the interest rate for the loan. The lender will check various factors like the insurance of the car and the income statement of the borrower.

Once this information is checked the lender will give a loan only upto 50% or more of the car resale value.

So if the value of your car has a steep depreciation, borrowing money on it, repaying the money with full interest within 30 days and the failure to this , paying additional charges and also losing your car, would turn out to be a much costly affair. Because of the advantage of having an asset as collateral, the lender can take full possession of the vehicle on default of payment of the borrower.

Many people have a misconception about these “anytime, anywhere” loans.

For example: You avail of a title loan for an interest of 15% per month, but when you compound these rates and calculate the annual interest payment, it comes to a whopping 180% barring the various loan fees and charges which are incurred. So now you know why exactly you shouldn’t be in favour of these loans.

Because of the tough economic crisis many people resorted to such kind of borrowing but faced the pinch when the annual interest rates jumped to more than 100%, paralysing the borrowers and instilling in them the fear of losing their vehicles.

Are These Loans Even Worth The Effort And Money?

During the time of a desperate need crisis this may look as a very feasible option, as it is a short term loan, but many financial advisors insist on keeping a distance from this monstrous financial product. Title loans operate in the most unregulated environment where the interest rates are almost bloated according to the convenience of the lenders. So only those people who can repay their loans within the stipulated time are at an advantage and the rest simply fall prey and end up losing their asset.

Enough said about the cons of these loans, the main question that arises is, what are the alternate methods for quick borrowing?

Methods And Ways Of Quick Borrowing

Relatives and family members:

Your family is the only one that will pull you out during your financial crisis. Hence probably borrowing small amounts of money with a promise to pay them back within a fixed period of time could be a safest option one could use

Borrow small loans from bank:

This option could be used when you have an asset to back your loan amount, which will be a necessity for the bank. So you could probably borrow a small amount keeping an asset like your house as collateral and repaying the liability directly to the bank.

Pay day loan or credit card cash advance:

Credit card advance might pan out to be another option where your bank would send you a payment check against your credit card and this money will be directly credited into your bank account. Although in this kind of a service the bank may charge a higher interest rate but they are any day better than gambling with the title loan.

A better option could be a pay day loan typically issued anywhere from $100 – $1,500 and can be deposited directly into your checking/savings account usually within 24 hours of filling out an application. This payment has to be paid within the next pay day.

Feel free to ask questions and share your suggestions and opinions.

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  2. A title allows you to get money based on the value of your vehicle while still being able to drive it. The title loan is based more on your car’s value than it is on your credit score.