Title Loans: Application Process, Interest Rates & Risks

Auto title loans first appeared in the market in the early 90’s to offer loans to persons with a poor credit score. However, these types of loans are different from other short-term loans, like the payday loans, in the sense that title loans are secured. The borrower is expected to use their vehicle to secure the loan. Therefore, since a borrower uses their vehicle’s title as collateral, there is a high risk of losing the car in the event of defaulting on repayments arising from high interest rates.

• Application process

Borrowers can find lenders of title loans online or from a store location. To secure a loan, applicants may be required to provide certain identifications, such as driver’s licenses, car registration, proof of income, a lien-free vehicle title, car insurance, references and address to confirm residence. However, some states do not require borrowers to provide most of these documents to secure a loan. Nevertheless, the borrower must have a clean title to the vehicle, which means the vehicle must be paid fully with no lien or current financing. Furthermore, borrowers must have full car insurance.

• Interest rates

Lenders from different states offer different interest rates, often ranging from between 35% and over 100%. Furthermore, the payment schedule varies significantly. Nevertheless, borrowers are required to pay interest on every due date. When the term comes to an end, the outstanding principle amount can be paid in lump sum. However, if the borrower is unable to repay the outstanding amount in one payment, they can rollout the balance and take-up a new car title loan. However, Government regulations limit the number of times borrowers get to rollout their loans to avoid being perpetually in debt.

• The risks

If a borrower defaults on their loan repayment, perhaps by late payments or cannot pay back, the lender can seek to repossess the vehicle and sell it, in order to offset the outstanding balance. Nevertheless, efforts of repossessing vehicles is done as a last resort simply because the process takes several months, with the costs on repossession, auctioning and court, eating up on the sales money they get. During this period, the lender is not receiving payment, while the car is depreciating. Many states require lenders to give the borrower a grace period of 30 days to recover their vehicle by settling the balance.

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