Car Title Loans 101: A Guide on Using the Title of your Vehicle as Collateral

When you need to cover an unexpected expense, but you’re short on financial means to do so, borrowing money can be your next option. But what if your loved ones can’t lend you cash or you have a bad credit score? If that’s the case, there’s no need to fret because you can access easy cash through using your car title as collateral for a loan.

If a car title-backed loan is new to you or if you already heard about it and just want to get the facts straight, here’s a simple guide you to help you find answers on the most common questions asked about it.

How does a loan backed by a car title loan works?

It basically works like any collateral loan.
In this case, you use the title of your vehicle as guarantee, and the lender will allow you to borrow an amount based on the value of your car. Once the loan is paid off, the car title will be returned to you. Otherwise, the lender will assume ownership over your car.

When your car title is used as collateral, you can still drive your vehicle and use it as usual for the duration of the loan. However, the lender will keep the title until the borrowed money with interest is paid off.

In addition, auto title loans are not limited to cars. In fact, you can also use the titles of your other vehicles such as SUVs, motorcycles, and motor homes as collateral.

Can I still qualify even if my car is not yet fully paid or if the car is under a loan from a different company?

Yes, you can as long as there is enough equity in your car. In fact, some lenders are willing to accommodate you even if your car’s title is under a loan from another lender.

Lending companies understand that each borrower’s situation is unique. Discuss your needs with them, so that they can work out a course of action that’s suitable for you.

How high are the interest rates for auto title loans?

Interest rates for auto title-backed loans vary among lenders. Typically though, they will give you a monthly interest rate and not an APR, just like in most types of loans. If your loan will run for more than a year, you can simply do the math to find the annual interest rate.

If the interest rate is set for 20% per month, it means the interest will total to 240% in one year. It can be pretty steep, but because of the convenience an auto title loan offers, that can be a price worth paying for.

Also, don’t hesitate to negotiate with your lender. In fact, some lenders can offer competitive interest rates that are below state standards.

How much money can I borrow if I use my car title as collateral?

The loan amount will depend on the value of your car. Lenders ask borrowers to bring their vehicles in for inspection. They will make an offer based on their appraisal, so make sure that your vehicle is clean and in great shape before evaluation.

Typically, the lender allows you to borrow an amount equals to about 50% of the worth of your vehicle, because they need enough wiggle room to recover in case you can’t pay them back.

What is the duration of the loan?

A loan backed by a car title can last for a few months to even a few years. It will all be up to what you and your lender agreed on.

While the loan is in effect, the lender will keep the title of your vehicle, but you can still drive your car and use it as your main mode of transportation.

Do I Need to Undergo a Credit Check?

Lenders usually don’t require credit checks for borrowers who use their auto titles as collateral. Because they have a guarantee, they pay little to no attention to your credit report. What matters is the value of your vehicle. That’s why this type of loan can be beneficial for people who lost their jobs and have existing debts.

What happens if I fail to pay?

If you fail to settle on time, the loan can default and the lender will assume full ownership over your car.

However, you can still negotiate with your lender if you think you can’t settle on time. They can make a compromise and lengthen the duration of the loan, but for a higher interest rate. Meanwhile, others may recommend to rollover the balance to a new loan, but this means a new set of administrative fees, processing costs, and possibly, a higher interest rate as well.

When your loan defaults, lenders will not just appear on your doorstep and take your vehicle on the first day after the due date. Usually, they are willing to sit down and discuss options with you. Remember, they are keener on getting their money back than acquiring your car and selling it.

How can I apply for this kind of loan?

Get in touch with the lender and express you interest in using the title of your vehicle as collateral for a loan. Depending on their policies, they may ask you to fill up an online form, or they will set an appointment with you. Appraisal of your vehicle follows.

They will make an offer based on their inspection of your automobile. Once you have agreed on the terms and signed on the contract, they will issue you a check or transfer the money to your bank account.

Lenders should give you a copy of the contract containing all the necessary information about the loan. Details should include the loan amount and duration, interest rate, additional fees, and penalties. Make sure you understand the fine print before signing on the contract.

Can I settle the loan before the due date?

Yes, you can. However, you may need to pay a prepayment penalty if you decide to settle the loan ahead of time. However, it’s still a case-to-case basis, because some lenders don’t charge an additional fee for early payments. It’s all in the fine print, so make sure that you read and understand the terms before signing the agreement. If there are any areas that are not clear to you, don’t hesitate to clarify them with the lender.

What are the pros and cons of using an auto title as collateral?

A loan that’s backed by the title of your vehicle is fast, easy, and convenient. If you need cash immediately, this type of loan will definitely work to your to your advantage. More so, it doesn’t require credit checks, so you can easily qualify.

The most obvious risk with this type of loan is of course, losing your car. More so, they may come at a high interest rate, so make sure to take time in comparison-shopping.

How do I find good lender to work with?

It’s all about doing research and being observant. First, find out how established a company is and if they have a good reputation or not. Second, be observant on how they interact with you. Are they genuinely concerned on providing a solution for you? Yes, you need the money and they’re in the business to earn, but a good lender should be more inclined on helping you out.
By Aris Moreno
Aris Moreno is a digital marketing specialist with over five years of experience. He loves to write about anything related to self-improvement, personal finance, internet marketing and science. Follow him on Twitter @arismoreno.

Copyrighted 2016. Content published with author's permission.

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