11Many people have probably heard about car title loans but have no clue how they work or even understand them. So the obvious question is how in the world do they work? And are they really a good financial choice? These types of car loans are sometimes referred to as auto title loans as well.
Most Important Part of a Car Title Loan
This type of car loan is basically a loan that is backed by collateral where the borrower will use his or her car as security for the loan. The car gets a lien placed against it and then the borrower has to submit an actual copy of their car title to their new lender. In fact, the borrower has to even provide the lender with their own set of car keys before the loan is processed. Obviously, whenever that loan has been repaid, all that stuff is then returned and the borrower gets back their title and their keys – the title lien gets removed as well. And should this borrower ever default on his or her loan payments, and then their car gets immediately repossessed.
These Loans Have Unique Requirements
So car title loans are basically short term loans. They also tend to come with interest rates that are high than that of traditional loans. And we are talking very high interest rates in some instances. In fact, APRs have been known to get as high as 35% and even more. And in return for these high interest rates, lenders will often not check the borrower’s credit history. But they do ensure that the car reflects the condition and the value that would support the amount of the car loan.
Seeing how a car title loan can actually be high risk loans for the lender, higher interest rates are applied in many cases. The reason is that lots of borrowers are seen to default on these loans as they are typically already in financial trouble in the first place. This is why they were willing to give up their car title for a loan.
Another thing about car title loans that borrowers like about them is many times they just take about 15-20 minutes to obtain the money. And these borrowers could get amounts that range from $100 to $15,000. Also, due to the higher risks with these kinds of borrowers, you probably will not see any traditional banks or credit unions offering these types of loans.
And with all of this, most borrowers still need to show that they have a reliable source of income and employment. When this is confirmed, the car of the borrower is inspected and appraised prior to any cash being given. And to protect themselves, lenders will loan borrowers only around 30% to 50% of the real value of their car. These amounts allow borrowers to profit in event of a loan default.
As far as what lenders will give borrowers depends on their auto and what its condition. They typically use Kelley Blue Book values as a reference point to get an idea of the resale value. Of course this should go without saying, but the vehicle of the borrower has to have an amount of equity with a free and clear title – in other words, there must be no other liens against the title of the vehicle. And it usually needs to have a minimal amount of car insurance protecting it as well.
Often times, loan repayments for these loans can be due in as few as 30 days, but there are also cases where a payment schedule is also worked out for borrowers. And when borrowers cannot pay back the loan balance, he or she can sometimes rollover the loan balance into a brand new loan that has higher interest.
Be sure that he know the ins and outs about car title loans before you get into one.
Read More here: https://www.consumer.gov/articles/1013-car-title-loans