You need money fast, but what if a bad credit rating prevents you from accessing traditional short-term loans or lines of credit? Taking out a car title loan is a way to get your hands on quick cash with no credit check and minimal income verification. It may sound simple enough, but this type of loan can lead borrowers to take on more debt and, in extreme cases, go without a car.
How car title loans work
If you were to take jewelry or other valuables to a pawn shop, an employee behind the counter would appraise your items and issue you a loan based on the value of your items. In this case, the pawnbroker will lend you money and charge interest. If you do not return the money within the agreed time, you will lose your items. This is similar to how a car title loan works.
In a car title loan, the lending company assesses the price of your car based on wholesale values and then grants you a loan based on the value of your car. The lending company then retains title to your car until your loan is paid off. The loan is not similar to when you purchased your car. This loan is a short term loan with a high interest rate; if you don’t pay the money back within a specified time – with interest – you’ve essentially sold your car to the default lending company.
Who is eligible
Since this type of loan is based on the equity you have accumulated in your car, with most title loan companies you will need to own your car. If you still owe money on your car loan, the title to your car is still with the bank, so you can’t use it as collateral for a loan. Other requirements may include a minimum age, proof of your residency, and proof of your income.
Read the big print and the small print
Driving your car to the title company to get the cash you need quickly might seem simple enough, but before you give that loan the green light, you need to know what you’re legally getting into. Look for the following information in your contract:
* How interest is calculated and the period for which the interest rate is calculated. For example, an interest rate of 3% may seem acceptable until you read on and see that it is 3% per month, which equals 36% per year. Also keep in mind that because car title lenders are in a different class than credit card companies or banks, they are not subject to usury laws and are therefore able to charge higher interest – much higher interest.
* What are the penalties for late payment or non-payment. Can a late payment lead to the withdrawal of your car? Does the interest rate on the loan increase or are additional fees charged for late payments?
* What are the mitigation rules? Are you required to go through mediation or can you sue the loan company if it becomes necessary later?
Alternatives to Car Title Loans
As with any loan, it is important to assess what other alternatives you might have to acquire the money you need. Compare the interest rates and penalties of other loan options that may be available to you.
* Credit Cards: If you need cash on the fly, be sure to compare your credit card rates with a car title loan. If your credit card doesn’t have a high enough limit to cover the money you need, call your credit card company and ask for a higher limit. The better your payment history with them, the more likely you are to increase the credit limit. You’ll still want to make sure to compare the rate, which should be lower than borrowing with a car title loan.
* Work Emergency Loans: Your company may have an emergency loan program available to help employees with short-term financial difficulties. Programs vary from employer to employer, but the loan can be interest-free or have a low interest rate set by your employer. Repayment terms also vary. Contact someone in your company’s human resources department to see if this is a service available to you.
* Payment extensions: If you are considering borrowing money because of an emergency, such as if you need money to pay your utility bill or rent, check to see if the recipient ( your utility company or landlord) will grant you a payment extension. A 30-day payment extension on your utility bill or a five-day extension on your rent could save you from spending big interest on a car title loan. If you receive permission to pay your rent late (payment extension), be sure to get the rent extension in writing so you don’t go to work one day and come home to find the locks removed. And, be sure to ask your apartment management company what your late fees will be, so you can carefully weigh your options.
* Personal loan from your bank: Banks offer personal loans with lower interest rates than car title loans, but may not be better than your credit card rates. The advantage of a personal loan from a bank is that you can discipline yourself to repay it within a set time frame, as there is a set number of months in which you must repay your loan.
* Payday Loans: Although payday loans can also charge high interest rates, you won’t lose your car if you break your contract due to late or non-payment.
* Pawning other valuables: If you’re considering getting a loan or selling a valuable asset to get the cash you need quickly, it might as well be something you can afford risk, like a guitar you don’t play. more or jewelry you never wear. Along the same lines, you may be able to receive more money for your items if you are willing to wait a bit longer, such as by selling your stuff through an online auction or online storefront. , such as eBay or Amazon.
Car title loans are one way to get cash when you need it, but they’re not the only way. If you need money fast, look for other options, such as credit cards, personal loans, payment extensions, payday loans, emergency workplace loans, and selling items you no longer use.