Following years of uncertain economic conditions, soaring inflation, and rising interest rates, many Americans report having more credit card debt than in emergency savings, according to a recent Bankrate survey.
The survey found that roughly one in three Americans now have more credit card debt than emergency savings, with both Generation X and Millennials claiming to have the highest credit card debt to savings ratio.
While inflationary conditions have started to improve over recent months, many more Americans, including those earning six figures per year, are living paycheck to paycheck — more than ever before.
As a result, more Americans are taking out loans and taking on credit card debt to combat rising prices, pay for everyday items, or cover unexpected emergencies. One such form of debt, aside from traditional credit cards and other short-term loans, is a title loan, which allows individuals to borrow a small percentage based on the value of their vehicle.
A title loan can be very attractive for someone requiring immediate capital or financial aid access. Depending on the loan provider, these loans can offer same-day payouts, which can be helpful in unexpected emergencies. Unfortunately, as with any form of debt, there are some risk factors involved in these sorts of loans that every person should know of beforehand.
What Is a Title Loan?
A title loan is a popular type of capital loan structure that allows an individual to borrow a percentage of money based on the value of their vehicle, usually, with a title vehicle loan, a person’s vehicle is used as collateral to secure the loan.
When taking out a title loan, the driver and original owner of the vehicle are still allowed to drive the car while repaying the loan. However, should the borrower miss any payments or cease to make future payments on the loan, the lender can repossess the vehicle and decide to either keep it until the loan is repaid or sell it to cover its losses.
Unlike other types of loans, where a bank or lender reviews a person’s credit score and history to determine their eligibility for a loan, a car title loan is considered an easier way to take on debt. The process involves the ability of a person to repay the loan and the value of their vehicle.
How Much Can You Borrow With a Title Loan?
The amount a person can borrow against their car with a title loan will largely depend on the lender and their level of risk appetite. On average, a person can borrow between 25% to 50% of the value of their vehicle.
Title loan approvals are usually completed on the same business day. However, this may differ depending on the lender and the process of evaluating all the necessary criteria.
Unfortunately, as with any type of short-term debt, these loans aren’t without risk. In the U.S., roughly one in five borrowers often have their car repossessed due to being unfit to repay the loan or missing out on payments.
Seeing as the person taking out the loan forfeits the title deed to their vehicle, they often run the risk of having the vehicle repossessed should they not fulfill their payment obligations.
What Are the Interest Rates On Title Loans?
A title loan can be a fast and easy way to access capital for emergency expenses. However, unlike traditional loans taken with a bank or formal lender, title loans typically have high interest rates and can quickly become a costly exercise for many cash-strapped individuals.
Before taking out a loan, it’s important to determine how much a person can afford and is willing to pay each month. With a title loan calculator, individuals can carefully review their affordability and determine how much interest they are likely to pay throughout the loan period.
According to Montana Capital Loans, borrowers are expected to pay 200% to 300% annually in interest, depending on the lender. The amount of interest will vary depending on which state a person resides in and whether an individual is taking on an out-of-state title loan.
An out-of-state title loan is precisely what the name suggests. It allows individuals to take out a title loan on their vehicle with a lender that’s not registered or located within their current state. With an out-of-state title, borrowers may be subjected to even higher interest rates due to the labor-intensive process of verifying and authenticating all the paperwork involved.
What Is the Maximum Amount a Person Can Borrow?
Depending on the type of lender a person uses, the maximum loan amount can be as high as $50,000. In some states, you may be allowed to borrow a minimum of $500 and $1,000; however, there may be a cap on the maximum amount a person is then allowed to borrow.
Another factor that may influence the amount a person can borrow is their eligibility, the value of the vehicle, and the potential risk level. While an individual may think they are eligible for a $25,000 title loan, the reality might be that their vehicle is valued at less than the loan amount, or other eligibility criteria might influence the final borrowed amount.
Can a Retired Individual Be Approved for a Title Loan?
Yes, if you are retired and have been so for many years, you are still eligible to apply for a title loan if you meet the criteria. Retired individuals who require access to capital immediately may take up a title loan if they meet the threshold and have a vehicle to provide as collateral.
The process of applying for a title loan as a retiree works similarly to that of a non-retired individual. A retiree may apply for a title loan using their vehicle as collateral in exchange for funding. A lender will then hold onto the car title by placing a lien on the vehicle, which will then pay out the capital as cash, a direct deposit, a check, a prepaid, or a debit card.
The lender will then be responsible for repaying the loan and any additional fees or penalties that they might incur throughout the title loan. Once the loan has been paid in full, the lender will return the vehicle’s title to the borrower.
Title loans work for retirees in much the same way they work for anyone else. Borrowers can put their vehicles up as collateral in exchange for funding. The lender holds onto the car title by placing a lien on it and then pays out the loan amount in cash. Payments are made to the lender, usually monthly, until the loan is repaid.
What Are the Requirements to Be Approved for a Title Loan?
Overall, applying for an auto title loan is much quicker, as loan amounts are paid out in one business day. Any individual above the age of 18 years, depending on state requirements, may be eligible for an auto title loan. Requirements for a car title loan:
- Must be 18 years of age or older
- Be a holder of a vehicle title with a positive equity value
- Have a consistent and stable proof of income
- Submit all the necessary documentation
- Provide proof of address
- Government-issued identification documents
- Understand the loan repayment requirements
- Fill out the pre-approved qualification application
- Provide recent photos of the vehicle
These requirements apply to any individual seeking an auto title loan. Retirees need to consider any potential limitations they may encounter with a title loan, as some lenders and states will have a maximum age limit for applicants of these loans.
The Benefits of a Vehicle Title Loan
As an alternative loan structure, title loans can provide significant benefits such as:
Immediate capital availability
With an auto title loan, a person may have immediate access to the approved loan amount. In most instances, loans are paid out within one business day or often on the same business day. Loans may be paid in checks, direct deposits, or prepaid debit cards.
Easy to apply
Any person with a valid vehicle title in their name can apply for the loan. Apart from a few minor loan requirements, a title loan is simple and easy to obtain, and depending on the lender, a person may have minimal pre-qualification criteria to fulfill.
No credit check
Besides providing proof of vehicle ownership and a consistent stream of income, title loan providers or lenders typically don’t conduct a credit check on individuals. Due to the limited credit-related requirements, title loans are often considered to be the most suitable alternative for individuals with bad credit or even a low credit score.
Fast and easy online applications
Most companies don’t have brick-and-mortar locations and instead require borrowers to apply for their title loans online. This helps the borrower save a lot of time and effort and ensures that they can apply for a title loan from the comfort of their home.
Multiple lenders to choose from
Unlike larger traditional loans available from banks and credit unions, which may often limit the number of options available, there are plenty of title loan lender options available to choose from. Additionally, many lenders are focused on providing fast and efficient service, which can make it easy for people to apply online and minimize the administrative burden.
The Risks and Drawbacks of Vehicle Title Loans
Unlike traditional loans that provide a person with more security, a car title loan isn’t without plenty of risks.
Risk of having your car repossessed
Seeing that a person is temporarily giving up the title to their car as part of the collateral to obtain the loan, individuals run the risk of having their repossessed should they fail to make payments or miss a monthly payment. By some estimates, between six and eleven percent of title loan holders have their vehicle repossessed due to failing to make payments.
Creates excessive debt cycles
Many car title loans may be granted for a shorter period of 30 days, resulting in borrowers obtaining rollover loans to cover loan repayments, fees, and penalties. Taking out rollover loans may result in excessive debt cycles that can cause individuals to have higher interest rates and repayments each month. As fees and penalties are added to the principal amount each month during the rollover period, a person could accumulate large amounts of debt at the cost of their vehicle ownership.
High interest rates
The cost of taking out a car title loan comes with a high price that often results in borrowers being unable to repay their loans fully or taking out rollover loans to cover the cost. A vehicle title loan can be a high-risk capital vehicle, and due to the nature of the loan, individuals are subject to high rates of interest, which are generally higher than the interest rates offered by banks and credit unions.
Legal implications
Car title loans are not legal in every state, and in some states, they are completely banned due to the nature of the loan capital structure, the high-interest rate burden borrowers carry, and concerns regarding consumer protections. Though some individuals may seek to use car title loans as an alternative financing option, they can have many legal and financial implications.
Creates a debt burden for next of kin
Carrying debt would mean that your next of kin or the individuals in charge of your estate will have to resolve unpaid debts following your death. Having a co-signer on an auto title loan might make the process easier for many people. However, this might result in the vehicle repossessed should the estate fail to repay the loan. Additionally, the co-signer of the vehicle is typically responsible for the remaining loan balance.
How to Protect Yourself From Title Loans
Depending on the loan provider and state where a person may take out the car title loan, different rules and laws may apply to the overall life cycle of the title loan. To protect yourself and your financial security, consider the following:
Know the ins and outs of title loans
As we’ve mentioned before, an auto title loan can be different from lender to lender, and depending on where a person lives, some states will have distinct regulations regarding these types of loan structures. Ensure that you read about the loan requirements and obligations during the initial pre-qualification process.
Seeing as these types of loans are not standardized, as with traditional bank and credit union loans, the conditions under which a person may be signing up can be different from those of a more traditional bank loan. It’s important to educate yourself first and know exactly what you are signing up for.
Consider an alternative financing option
Although a car title loan might seem straightforward and flexible, allowing individuals access to financing options immediately, some underlying issues may cause bigger short-term risks for borrowers.
Instead, it’s perhaps better to seek out any possible alternative financing options that a person may have available. For instance, a person can take advice from a credit counselor to assist with financial planning or set up a better payment plan with the loan provider.
Other alternatives include borrowing money from a trusted friend or family member who may be comfortable with providing you with the money needed. Depending on your state, state-sponsored financial assistance programs or government agencies may be available to provide some financial support.
Calculate loan affordability
Before signing the loan agreement, review the loan’s affordability using a trusted source. By calculating affordability, a person can estimate how much money they will need to repay the loan and what their monthly installment might be. With an affordability calculator, individuals can plan their finances more accurately and make the necessary budget adjustments.
Know the loan prerequisites
There may be some instances where a lender requests a borrower install a GPS tracking device in their vehicle to keep track of the vehicle should the borrower be unable to repay the loan. While a person can still drive their vehicle while having a lien placed on it, there may be some restrictions, including having a “kill switch” installed on the vehicle, which can prevent a person from starting or using it.
Minimal credit impact
Many lenders will not conduct a credit check on a person when applying for a title loan. This will not hurt your credit score, seeing as a lender will not perform a hard query, which typically removes about five or fewer points from your credit score.
Similarly, if you have repaid the loan in full without missing a payment, a lender is not required to report any payments to credit bureaus, which means that successfully paying off the loan will not help an individual build a better credit score.
Fortunately, some good news exists for borrowers who cannot repay their title loans. Should they default, the lender will be required to submit a notice that complies with the Fair Debt Collection Practices Act. This would then mean that an individual’s vehicle will be repossessed and sold to cover the outstanding loan amount. However, any remaining debt will not be passed through to a debt collector or reported as a delinquency.
Have a cosigner on a personal loan
To avoid your vehicle from being repossessed, you can instead apply for a personal loan from a traditional lender such as a bank or credit union. This alternative option allows you to share the risk with a co-signer and may help you qualify for an unsecured loan. With a co-signer, it’s important to consider the following:
- Choose a person that has a good credit score
- Choose a person you trust, or you feel comfortable with sharing important information
- Carefully explain your financial obligations to your co-signer
- Sharing the risk might be a better way to hold you accountable
Keep in mind that when applying for an unsecured personal loan, the co-signer may be at risk of having their credit score affected should you or the person they co-signed the loan with miss any payments or fail to pay back the loan. Not only this but your credit score will also be affected when you miss any payments on a loan or debt.
Is a Title Loan Worth It?
Depending on your financial situation, a car title loan may be a suitable option if:
- You need immediate financing
- You are the owner of an asset-carrying vehicle
- You have limited alternative financing options
- You are capable of repaying the loan
- You are comfortable with the added risk of having your vehicle repossessed
A car title loan is not a suitable option for individuals who:
- Already have financial troubles or difficulty repaying their debt
- Run the risk of losing their vehicle due to missed payments
- It is considered an increased financial risk to lenders
- Already carry an excessive amount of debt
- Have restricted capital or an unreliable source of income
While a vehicle title loan might seem like a good idea on paper, it’s essential to know that having access to immediate capital financing can come at a high price, and borrowers typically run the risk of having their vehicle repossessed by lenders should they fail to meet payment obligations.
Endnote
A car title loan provides individuals with quick and easy access to financing options that they can use to cover emergency expenses or repay other debts. These types of loans are flexible, and any person over 18 who is considered the owner of a vehicle and has a steady source of income can apply for a title loan.
Unfortunately, taking out an auto title loan carries some risks. The biggest risk is having your vehicle repossessed or being restricted from using the vehicle throughout the loan’s lifecycle. Additionally, a title loan carries high interest rates, which can financially burden many people.
Instead, it’s advised to seek out alternative financing options or consider consulting with a financial planner or advisor to assist with finding more suitable financial solutions. Before signing off on a title loan, make sure that you are working with a reputable lender, and that you have read through all the loan documentation.
Featured Image Credit: Photo by Jakub Zerdzicki; Pexels
