- How Does a Title Loan Work?
- How Do Title Loan Rates and Fees Compare to Other Loans?
- What Are the Requirements for a Title Loan?
- How Much Can You Borrow With a Title Loan?
- When Should You Get a Title Loan?
- Benefits of a Title Loan
- Potential Drawbacks of Title Loans
- Cycle of Debt
- Why Choose 5-Star Car Title Loans?
A title loan is a type of secured loan that uses the borrower’s vehicle as collateral. These loans are typically used by individuals who need access to quick cash but don’t have the credit score or financial resources to obtain traditional loans from banks.
Title loans are short-term loans that provide borrowers with much-needed funds when they need it, making them an incredibly useful tool for those in difficult financial situations.
With a title loan, borrowers get access to cash without giving up ownership of their vehicle and without going through long waits or complex paperwork processes.For those looking for a reliable source of short-term funding, let’s take a closer look at how a title loan works.
How Does a Title Loan Work?
Traditional loans work by having the borrower apply for a loan from a bank or other lender, which then evaluates the borrower’s credit and financial situation to decide if they are eligible. For this process, borrowers typically need to meet the following criteria:
- Good credit score: A credit score of at least 610 to 640 is generally required to qualify for a loan. If you have a credit card and consistently pay off your monthly statements, this is usually sufficient to qualify. However, 42% of Americans were denied a financial product because of their credit history in the past year, and many people don’t have credit at all.
- Stable income: Banks and other lenders usually require borrowers to have a reliable source of income for the past six months. If you have recently changed jobs or can’t prove that you have had a steady income, this could disqualify you from traditional loan products.
- Minimum monthly payments: Borrowers are usually required to have enough money coming in each month to cover the loan payments plus interest. This requirement, combined with other criteria, can make it difficult for individuals with low or no incomes to obtain loans.
The reason for this is that traditional lenders are investing their money in the borrower and need to have the assurance that they will be paid back. Without some form of legitimate proof, interest alone isn’t an incentive for traditional lenders.
With a title loan, the borrower is not required to submit as much information and can be approved in less time. This is because the loan relies on the vehicle’s value as collateral. Since the loan is secured by the vehicle, the lender can repossess and sell it if the borrower defaults on payments. Even individuals with low income or bad credit can get approved for a title loan.
The lender will appraise the car to determine its worth and then provide a loan amount relative to that value. The loan is then secured by the title of the vehicle, meaning that the lender holds on to it until the borrower repays the loan in full.
This doesn’t mean that the vehicle owner doesn’t have access to their car; you can still use it as usual. The only difference is you will receive the title back once you have repaid the loan.
How Do Title Loan Rates and Fees Compare to Other Loans?
If you’re considering a car title loan, be aware that the associated interest rates are considerably higher than those of your typical bank loans. Interest rates may vary by state and in some cases, where no cap is present, could reach up to 25% per month or 300% annually.
In this hypothetical scenario, a consumer who borrows $1,000 would be legally required to repay $1,250; that’s an additional $250 that must be paid in interest. The repayment period for title loans is also shorter than that of traditional loans and could range from 15 to 30 days, depending on the loan amount and your state’s regulations.
Lenders usually include a lien fee as well. In states that don’t regulate title lending, some lenders may even add additional fees like origination fees, document fees, key fees, processing fees or other hidden costs.
Origination fees (upfront fees for setting up the loan) in particular have been known to range from 0.5% to 1% of the total loan and can be added onto the principal amount. Even if you decide to pay off the loan early, title lenders may still charge an early payoff fee, so it’s essential to read through your agreement carefully before signing.
What Are the Requirements for a Title Loan?
While car title loans seem easy to obtain, there are still requirements that must be met in order to qualify. Here are the most common ones:
- Sole ownership of the vehicle: You must provide proof of sole ownership of the vehicle used as collateral. This can include a valid registration and/or insurance policy. If you are not the sole owner, they will need to transfer vehicle ownership to you.
- Government-issued ID: Lenders require you to provide a government-issued form of identification to verify that your photo ID matches the name on the vehicle title. It can be a driver’s license, passport, or other state ID card.
- Current vehicle registration: You will need to provide proof of up-to-date registration and insurance for the vehicle used as collateral.
- Proof of insurance policy: You must have a valid insurance policy for the vehicle used as collateral to qualify.
- Income source: Most lenders require proof of income, such as a paycheck stub or bank account statement that shows your recent earnings. This is to ensure that you can repay the loan.
- Vehicle condition and value: The lender will assess the car’s value and condition to determine the loan amount. Generally, cars that are in good condition and have low mileage will qualify for higher loan amounts.
- Two or more references: The names, phone numbers, and addresses of two or more references are typically required.
- Car keys: Functioning copies of the vehicle’s keys will have to be provided, as the lender will need to repossess the car in case of default.
- Age requirement: Some lenders require borrowers to be at least 18 years old to qualify for a car title loan.
These requirements disqualify those who can’t provide proof of income, similar to traditional loans. They also disqualify those who lease their vehicles, since they don’t own the car titles.
Title loan requirements typically limit qualification to those who have newer vehicles. For instance, a 1990s model may not qualify for a loan, regardless of its condition.
How Much Can You Borrow With a Title Loan?
When it comes to car loans, you can usually receive 25% to 50% of the automobile’s value. On average, loan amounts range from $100 to $5,500 according to the FTC. However, some lenders may let you borrow up to an impressive $10,000 or more. Our loan amounts typically start around $2,600 and go all the way up to $20,000.
To secure your loan once approved by the lender, the title to your car must be signed over to them and the keys have to remain with them until you’ve repaid the loan in full. Even though you can still drive your car, certain lenders may install a GPS tracking system or even make copies of your keys as security measures. These practices allow them to repossess the car from you in case of nonpayment on the loan.
In most cases, you can expect your lender to require repayment of the loan within 30 days. However, some lenders may offer longer terms that can go up to several months or even a year, depending on the amount you borrowed and your credit history.
Working with 5 Star Car Title Loans, your repayment period will be either 24 or 36 months, a considerably more flexible option than the traditional 30-day term. To see how much you qualify for, you can use our car title loan calculator.
When Should You Get a Title Loan?
Car title loans are ideal for someone who might need fast cash, but that doesn’t mean that they’re a good idea for everyone. A car title loan should only be considered when you have an emergency where you need fast cash and don’t have any other options, such as borrowing money from family or friends. Let’s take a look at some instances where getting a car title loan is a reasonable decision:
- You are facing an unexpected medical bill or emergency repair work on the car.
- You need to pay your rent or mortgage due to sudden unemployment.
- You have urgent travel plans and don’t have enough money saved up.
- You need to pay for an upcoming tuition fee or any other expense.
- You know for sure that you can pay back the loan in time without putting yourself in a financial bind.
- You cannot find a less expensive or non-collateralized loan alternative (a credit card cash advance, payday loan alternative from a credit union, or a personal loan with a co-signer).
Since car title loans can be expensive, there is some inherent risk involved if you lack financial literacy or you don’t have a grip on your finances. There are many situations where getting a car title loan might not be a great idea:
- You are already dealing with a lot of debt.
- You plan to use the lump sum to pay off another kind of debt.
- You have friends, family members, or peers who would cosign a loan or loan you the money themselves.
- You don’t plan on being able to pay the loan back in full.
- Your employment or financial situation is rocky, or you are at risk of losing a significant portion of your income.
- You feel uncomfortable with the terms of a loan (putting up your car as collateral) before signing.
Before going for a car title loan, it’s important to take an objective look at your personal finances and ask yourself whether you really need a loan or not.
Benefits of a Title Loan
If you decide that using the value of your vehicle as collateral is a viable option, there are plenty of benefits that come with it.
Any Credit Is Accepted
Applicants with any credit score (or without one altogether) are welcome to apply for a car title loan. Since the lender is using your car’s value as collateral, they don’t need to consider your credit score when making a decision. That makes them perfect for someone who has bad credit and cannot secure traditional loans from banks or other financial institutions.
Car title loans are known for their fast turnaround time and quick processing. Even though the actual process can take anywhere up to a couple of hours, you can potentially get your money on the same day if everything goes as planned.
No Guarantor Required
Car title loans don’t require you to have a guarantor or co-signer in order for your loan to be approved. That makes them perfect for anyone who doesn’t have someone ready and willing to sign off on their loan.
No Vehicle Requisition
With car title loans, you can still keep your vehicle while you are repaying the loan. You won’t have to give up your daily routines or change anything about your schedule in order to make sure that you can pay off your loan.
Straightforward Payment Plan
When you take out an auto title loan, you can expect to have access to a clear and easy-to-follow payment plan. Throughout the loan term, you’ll always know exactly how much you owe and when the next payment is due. If you work with a reputable title loan company like 5 Star Car Title Loans, you can rest assured that you’re getting a fair deal with no hidden fees or charges.
Potential Drawbacks of Title Loans
Before taking out a title loan, there are certain factors that everyone should be cognizant of. Unlike secured loans, these types of loans have certain drawbacks that you should consider before making a decision.
High Interest Rates
Auto title loans are high-interest loans. Payday loans often come with an annual percentage rate (APR) of around 300%, which calculates to a 25% monthly interest rate. For example, if you take out $1,000 and your fee is 25%, you will pay back $1250 after thirty days (without factoring in additional charges).
You can typically expect a lower rate through our title lenders than this; 60% to 175% is usually our range. However, even an interest rate of that size can have serious implications if you don’t pay the loan off on time.
Repossession of Your Car
Since car title loans use your vehicle as collateral, you risk losing it if you don’t pay the loan back on time. After the lender repossesses your car, they will then sell it to cover their costs and any damages associated with repossession. Then, you’ll be left without a car and with a much bigger financial burden.
Cycle of Debt
Your lender may offer you a renewal or rollover option for the existing loan if you’re struggling to pay your debt off. However, this will result in added fees and interest that get tacked onto the amount of money you owe.
Pretend you borrow $1,000 with a 25% fee and can only pay back the amount of $250 after 30 days: If your lender offers you a rollover loan, then the remaining balance of $1,000 will be transferred to a new loan along with additional interest and fees.
If you keep up with the same rate, after 30 days you’d owe $1,250. If, however, you decide to pay off your loan in full once it ends in 60 days, then not only would you have borrowed a total of $1,000, but paid off an additional sum of $500. This doesn’t even include any additional fees that may be charged.
In situations like this, borrowers can quickly end up paying higher costs in interest and fees than the amount they initially borrowed. You can avoid this by working with your lender as soon as possible if repayment becomes difficult. We always encourage our customers to think twice about taking out a loan if they know that it’s going to be impossible for them to pay it off on time.
The title loan industry has unfortunately seen its share of predatory lenders. These companies often charge high interest rates and predatory finance fees, taking advantage of borrowers who are already in a difficult financial situation. That’s why it’s so important to do your due diligence when you’re considering any type of loan, including car title loans.
When evaluating a potential title loan lender, make sure they are licensed in your state and that they adhere to the applicable federal and state laws. Be sure to take a look at any reviews or testimonials to get an idea of how their customers really feel about them. Beyond that, you should look at the following criteria:
- Repayment terms: Installment loans are usually the best option for car title loans because you can break up your loan payments into smaller amounts overtime. However, single-payment loans are still available. Determine whether you are able to pay the loan off in a single payment or if you are better off with an installment loan.
- Interest rates: Avoid lenders that charge exorbitant interest rates, no matter how desperate your financial situation is. If they are charging a 300% annual percentage rate, for example, look for another lender.
- Fees: Make sure you’re aware of any fees the lender may charge, including prepayment and late payment fees. The more transparent a lender is about their fees, the better. And the fewer fees they charge, the more reliable they generally are.
- Value proposition: If it seems too good to be true, it probably is. Lenders may offer huge sums of money with no credit checks, which can be a red flag for predatory practices.
It’s essential to exercise caution, do your due diligence, and trust your gut when it comes to any loan, but this is especially the case when it comes to car title loans.
If you’re looking for a valuable informational resource on car title loans, the Consumer Financial Protection Bureau (CFPB) website has a section dedicated to auto loans.
Why Choose 5-Star Car Title Loans?
When you work with 5 Star Car Title Loans, the process is simple:
- Requirements: First, we pre-qualify you so that you know exactly how much you can borrow. The requirements are minimal and easy to meet—all we need is proof of income, a valid driver’s license, and the title of your car.
- Application: You can fill out our application online, and all we need is the aforementioned requirements, plus some additional information about your vehicle’s mileage, make, and model.
- Approval: In many cases, our clients receive approval the same day. You’ll be informed of the amount you can borrow so that you can decide whether or not this is the right solution for your financial situation.
- Loan funding: Once you’re approved, you can either visit one of our branch stores or receive money through MoneyGram. Alternatively, we can use a prepaid debit card to direct deposit your loan proceeds. At this point, we also install a GPS device at one of our installation centers in your car as an added level of security.
- Repayment: We are flexible with repayment, and you can make payments online or in person at any time. Plus, you won’t ever be charged a prepayment penalty or late fee if necessary adjustments need to be made to your loan agreement. Through our online customer portal, you can check your loan balance at any time. You can also pay by phone, through money order, or with cash.
- Loan Closure: Once the loan is repaid in full and you have paid all applicable fees, we will remove the GPS device and release the lien on your vehicle title.
At 5-Star Car Title Loans, our goal is to provide our customers with a transparent and hassle-free experience. We are committed to finding the best solution for each of our customers, and we strive to make our loan process quick and simple.
We take pride in offering competitive interest rates, flexible terms, and the best customer service around. That’s why 5-Star Car Title Loans is your best choice for a title loan lender.
When it comes to taking out a title loan, you’ll need to do your own research and be careful of any predatory practices. To make sure you’re getting the best deal, choose a lender that is transparent about their fees and interest rates and offers flexible payment options.
At 5-Star Car Title Loans, we provide an easy loan process with minimal requirements, competitive interest rates, flexible repayment terms, and the best customer service around. Contact us today to learn more about how we can help you get the cash you need quickly and easily or click here to start the application process now.