An auto title loan is a short term loan in which the borrower’s car is used as collateral against the debt. Borrowers are generally consumers who are not eligible for other financing options.
If you live in a state that allows car title loans (see: States That Allow Car Title Loans), here’s how to get one to work. The borrower brings the vehicle and the necessary documents to the lender. While some title loan applications are available online, lenders should always check the condition of the vehicle – and all documents – before releasing funds. The lender retains title to the vehicle, places a lien on it, and delivers the money to the borrower.
The loan limit is typically 25-50% of the car’s cash value (The borrower pays off the loan, plus fees and interest, within the allotted time (typically 30 days) and gets the title back, without lien.sese
Key points to remember
- Auto title loans are short term secured loans that use the borrower’s car as collateral.
- They are associated with subprime loans because they often involve high interest rates and borrowers with poor credit scores. and not all states allow them.
- To get a title loan, you will need to provide documentation proving that you are who you are and that you own your vehicle, that you have earned income, and at least two references.
- Sometimes additional steps are needed in order to reduce the risk of the lender, such as installing GPS trackers on the car to help with the potential repossession.
Documents you will need
In order to get a car title loan, also called a pink slip loan, in most cases a borrower must own the vehicle; there can be no lien on the title.seLenders also require certain documents, including some or all of the following:
- Original vehicle title indicating sole ownership
- Government-issued identification corresponding to the name on the title
- Utility bill or other proof of residence corresponding to the name on the title
- Current vehicle registration
- Proof of vehicle insurance
- Recent pay stubs or other proof of the ability to repay the loan
- Names, phone numbers and addresses of at least two valid references
- Working copies of vehicle keys
Some lenders also require that a GPS tracking device be attached to the car, in case the borrower defaults and the lender earns the right to repossess the car. Some of these devices are designed to allow the lender to deactivate the car remotely.sese
You don’t need good credit to get a title loan. In fact, most title lenders won’t check your credit at all, since the loan is entirely dependent on the resale value of the vehicle. Likewise, you don’t need to be an employee to qualify for a title loan.sese
Prices and fees
Auto title loans are considerably more expensive than traditional bank loans. Interest rates vary, but in states where the interest rate is not capped, it is usually set at 25% per month or 300% per year.seThis means that a consumer who borrows $ 1,000 will have to repay $ 1,250 at the end of the 30 days to avoid default.
Most lenders charge a lien fee. In states where securities lending is not regulated, some lenders also charge setup fees, document fees, key fees, processing fees, or other fees.seThe fees add up quickly and can add up to an additional $ 25 (or more) on top of the loan and interest charges.seBe sure to add up all the fees when you calculate the total cost of the loan.
(For more on this topic, see: Car Title Loan Limits).
Example of a title loan
Say Maria recently lost her job and is now struggling to make ends meet to make rent. As a short-term solution, she decides to borrow money using a car title loan against her vehicle, which has a current market value of $ 2,500. The loan provider agrees to extend him an auto title loan for $ 1,250.
In the application process, Maria must provide proof of title (that she owns the car) as well as additional documents. The advertised interest rate was 20% for the 30-day term of the loan, but Maria made the mistake of assuming the interest rate was already annualized. The true annualized interest rate (APR) was actually 240%! – much more than Maria would have knowingly accepted.
At the end of the month’s term, Maria had to repay $ 1,500, far more than the roughly $ 1,270 she expected. Given her desperate financial situation, Maria could not find the additional $ 230 and was therefore forced to give up title to her car.
The bottom line
The best candidate for an auto title loan is someone who owns a vehicle, understands the potentially high cost of the loan, and has a reasonable expectation of having access to the cash needed to repay the loan before the repayment period expires. If there is no clear and realistic plan to repay the loan, an auto title loan can amount to selling the vehicle for half or less of its value.
Many title borrowers renew their loans multiple times, making financing much more expensive overall. So, again, the most critical consideration is the ability to repay the loan on or before its due date.
(For more information see Get a car title loan.)