A car title loan uses the vehicle as collateral. These loans afford borrowers the opportunity to acquire short-term cash in as little as fifteen minutes. Unfortunately, this speed and convenience come at a cost to the consumer. In this article, we're going to discuss the topic of car title loans. Also known as car collateral loans, title loans, and pink slip loans, we'll talk about the predatory lending practices that sometimes accompany these offers. We'll also discuss some of the practical alternatives to borrowing money through title loans. But first, we're going to review the structure of these deals.
Car Collateral Loans
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The names on these loans can be misleading because lenders may provide borrowers with access to the equity they have not just in cars, but in other motor vehicles too. For example, a lender might write loans for cars, trucks, jet skis / personal watercraft, boats, and even motorcycles. Typical borrowers are looking for a quick source of relatively small sums of money to borrow over a relatively short timeline. These loans are often sought by borrowers who have a bad credit record or a poor credit score since lenders usually do not consider this information before writing the loan (if you're unsure whether you need car title loans in the first place, we have an article where you can find out what credit score is needed to buy a car). The primary concern of the lender is the amount of equity the borrower has in the asset. Most lenders require the borrower to hold the title to the car, while a smaller number of lenders will provide loans even if money is still owed to creditors.
Structure and Process
The loans are considered very short term, and targeted to individuals in need of immediate cash. Borrowers may qualify in as little as fifteen minutes, and the amount borrowed may start as low as $100. The first payment on the loan is usually due in as little as 15 days after the money is received from the lender.
Car title loans will have relatively high interest rates because lenders do not check the applicant's credit history, and rely on the equity in the car as collateral. Lenders will generally offer borrowers the opportunity for loans up to 50% of the car's resale value. Payments on loans often resemble balloon mortgages, where the borrower is only responsible for paying the interest on the loan each month. These are sometimes referred to as interest-only payments. Under these conditions, a final payment of the outstanding principal is due at the loan's termination, or the balance owed is rolled-over into a second loan. State laws usually prohibit lenders from charging prepayment penalties, and limit the number of times a loan can be rolled over.
Documentation
The loan process starts by having the borrower complete an application, as well as provide documentation such as:
Proof of residence (name and address on a utility bill is usually sufficient)
A copy of a valid driver's license
A copy of last year's federal income tax return
Proof of the income source identified in the application (pay stub)
A copy of the car's title (also known as a pink slip in California)
A copy of the car's registration
Proof the car is insured
Since the loan is secured by the vehicle, these offers are frequently marketed to consumers that have declared bankruptcy. Lenders are less concerned with the borrower's credit score than they are with the overall condition and value of the car. If the borrower defaults on the loan, the lender has the option to repossess the vehicle and sell it to collect the money owed.
Loan Fees and APR
The fees charged on a collateral loan are unusually high when compared to those charged on a more traditional loan. Agreements may provide for:
Processing Fees: such as the charges related to the processing of an application
Document Fees: costs associated with the collection and inspection of documentation provided by the borrower
Delinquency Fees: these are late fees on outstanding balances, where the periodic payment is received after its due date
Return Check Fees: a charge related to the processing of checks that are returned unpaid
Reimbursement of Expenses: reasonable charges related to services rendered in connection with the loan. For example, a fee may be charged to inspect the car's condition and/or provide an appraisal of its value
The most problematic area for these loans is the interest rate charged. The annual percentage rate, or APR, on car title loans start at around 40% and may be in excess of 500%. As a reminder, the APR on a loan not only includes the interest rate charged but also the impact of fees. These high-interest rates are the price paid by borrowers for the convenience of having quick access to money. They are also the primary reason borrowers need to be aware of the predatory lending practices that can accompany these loans.
Predatory Lending Practices
The term predatory lending is used whenever a practice is considered unfair or abusive to the borrower. This can also include situations involving fraud, aggressive sales strategies, charging excessive fees, or inducing the borrower to refinance a loan. Individuals can help to protect themself from these practices by remaining an informed borrower. Ask questions about fees and penalties. Be on the lookout for unnecessary loan add-ons such as insurance policies. Read all documentation thoroughly, and understand the interest rate charged on the money borrowed; stated in terms of the APR. Find out if the monthly payments will change over the course of the loan. Finally, shop around to get the best deal.
Alternatives
Before borrowing money using a title loan, it's advisable to consider the following options:
Home Equity Loans: while these loans use a home as collateral, they are structured to help pay for costs such as unexpected medical expenses. Interest rates on a home equity loan will be more reasonable than a title loan.
Household Budget: there is always the option of living more frugally. Creating a household budget is a great way to monitor expenses and discover new ways to save money each month.
Credit Unions: these financial institutions tend to provide better service to their members, and are usually committed to helping improve the financial health of their membership.
Borrowing from a Friend: as painful or humbling as this might seem, borrowing money from a friend or family member is a good choice if paying the money back is realistically achievable. If not, there's a chance of losing a close friend, and that might not be worth the risk.
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