Do auto title loans sound too tempting to you? There are some important things to consider about auto title loans before you take such a decision!
Auto title loans are secured & short-term loans and they are among the most expensive type of loans due to high APR. Also, they use your car as collateral and you risk losing it (repossession) if you default on the payments. For this reason, auto title loans have very low requirements and almost anyone can get one. Auto title loans are often equal to 25-50% of the vehicle’s value.
Depending on your credit score, you have some other auto loan alternatives as well.
Important things to Consider Before You Sign for an Auto Title Loan
Car title loans are designed for those who need cash fast and they don’t have a good credit score. These loans are risky, so you should know a few things before you apply for one:
- You have to own your vehicle to get an auto title loan. This is the most important requirement to get approved for an auto title loan. You have to be the owner of the vehicle or at least have equity in it. Although it’s called auto/car title loan, it applies to other vehicles too such as trucks or motorcycles.
- Auto title loans have high interest rates and high fees. It’s common for lenders to charge about 25% monthly of the loan amount. For instance, a 30-day auto title loan for $2,000, you’ll have to pay $2,500 at the end of the month. You may need to pay additional fees as well. This means that this kind of loan has an APR of 300% or more which is much higher than any other form of credit.
- The lender has the right to take ownership of your vehicle if you stop making payments. If you can’t afford to pay the full amount at the end of the month but you can pay back the interest rate, the lender will probably roll over this amount to a new loan. However, if you stop making payments for 2-3 months, the lender will probably start the process of taking your car with or without your concern.
How Can I Get an Auto Title Loan?
Usually, you can get an auto title loan in a bank or by applying online. No matter which method you use, make sure to ask the lender about the final amount you’ll have to pay and the exact APR and interest rate.
Because this type of loan uses your vehicle as collateral, you don’t need to have a good credit score or payment history. Actually, the majority of the lenders will not even check your credit score.
However, you’ll need to provide proof that you’re the sole owner of the vehicle and it’s not used as collateral in another loan. Also, you’ll need to provide some other documents that include your personal details. Some lenders will ask for a copy of your vehicle’s keys or even place a GPS tracker on your vehicle so they can track it down if you stop making payments.
Auto/Car Title Loans Alternatives
Depending on your credit score, you have some other better alternatives to auto title loans. Obviously, if you don’t have a poor credit score you should avoid getting an auto title loan and use some of the following alternatives:
- Credit card cash advance. If you need cash fast for an emergency, you can use your credit cards to withdraw cash from ATMs. Beware, that this comes with higher interest rate than using your credit card for common purchases. However, you won’t need to use your vehicle as collateral and the APR will probably be better than an auto title loan.
- Personal loan: Banks often provide other options such as payday loans or personal loans. The APR is often high and you may end up paying more compares to a car title loan. On the other hand, they don’t require your vehicle as collateral.
- Payday alternative loans and CDFI loans. Some federal unions, credit unions, and non-profit organizations provide loans with better terms than an auto title loan. They often are a better option, but you’ll need to be a member and you may not get the cash as quickly as an auto title loan.
- Ask family or friends for a loan. If your financial situation is bad you probably can’t pay back an auto title loan, you should avoid it. It’s much better to ask family members or friends to help you out and they will probably don’t ask for your car if you delay their payment.
Are auto/car title loans worth it?
The only scenario that auto title loans worth the risk is when you need cash as soon as possible and you have a poor credit score. Of course, you’ve to make sure you can pay back the full amount at the end of the billing period.
Sometimes, auto title loans can be cheaper in comparison with a payday loan that doesn’t require collateral. No matter what type of loan you decide to apply for, you should perform market research and compare your options.
If you find out that a car title loan is suits your needs more, you can consider applying for one. Remember that these are short-term loans, so you’ll have to repay the full amount soon, often in about 15-30 days.
What happens if I fail to pay back an auto title loan? What are the risks of auto title loans?
If you’re unemployed or you don’t have other sources of income, you should avoid getting an auto title loan. This is because the consequences can be destructive for your financial life and your credit score too, even though many of the auto title loan companies do not report to the three reporting bureaus, to begin with.
More specifically, if you fail to pay back the full amount at the end of the billing period, you’ll face the following problems:
- Risk of never-ending debt: If you can pay only the fees and not the full amount at the end of the billing period, your lender will roll-over your loan into a new one. This way, you’ll have to pay again the same or higher fees without getting closer to repay your debt. This situation can go on until you manage to successfully repay your loan and you’ll end up paying huge rates.
- Repossession of your vehicle: If you stop making payments for a few months, your lender has the right to repossess your vehicle without warning. No matter what tricks you’ll use to avoid that, you have already signed that the ownership of the vehicle is no longer yours.
- Decrease of your credit score: After you stop making payments and your lender repossess your car, they will add a negative entry on your credit score. This comes with late payments as well which is the most important ranking factor. As a result, a single repossession can deduct about 100 points from your credit score. It’s possible to remove repossession from your credit report, but it’s not easy or guaranteed.
- Risk of paying too much money: For example, let’s say you borrowed $1,000 using an auto title loan and you have to pay $1,250 at the end of the month. If you can afford to pay only $250, your lender will roll-over your loan. The new loan will be the same starting amount plus fees ($1,250). If you fail to pay again the full amount, this will happen again. That’s why you should pay the full amount at the end of the billing period, otherwise, you risk wasting too much money.
When to use an auto title loan?
Always consider your cheaper options before you apply for an auto title loan. Is it the best choice for the fast cash you need?
If it is so, first you should compare the available lenders. Make sure to compare APRs, fees, and the total amount you’ll have to pay back. Never borrow more than you can pay back, otherwise, you risk too much.
In the meantime, you can read our free “DIY Credit Repair Guide” to start building your credit score on your own and be eligible for better interest rates and credit cards.
Auto/Car Title Loans FAQs
All types of loans deduct a few points from your credit score when you apply for them. Auto title loans are no exception and they won’t decrease your credit score as long as you successfully pay it back on time.
Usually, you can get about 25%-50% of your vehicle’s value. The common range for an auto title loan is $100-$5,500. Sometimes the loan can be more than $10,000 if your vehicle’s value can justify this amount.
Yes, the majority of the lenders will ask to check your insurance or they will have as a requirement to purchase an insurance-related add-on along with your auto title loan.
No, they aren’t. Auto title loans require a single payment at the end of the billing period so they can’t drastically improve your credit score. Further, they’re very expensive types of credit. There are much better ways to improve your credit score such as credit builder loans or using responsibly a credit card.
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