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Title Loan

By Julia Kagan

Updated January 15 2021

Reviewed by Thomas Brock

What is a title loan?

An entrepreneur’s title loan is an loan that requires an asset as collateral. Title loans are extremely popular because of two key reasons. First, a borrower’s credit score isn’t taken into account in determining the eligibility in order to get the loan. And second, thanks to looser application requirements the title loan can be approved quickly, for amounts as small as $100.

Key Takeaways

A loan that requires an asset to be used as collateral is referred to as a title loan.

Title loans are well-known because they don’t look at the credit score of an applicant and they are approved very quickly.

The most well-known type that is a title loan is one that is a title car loan that is where the car itself is the asset set on the line as collateral.

Title loans are typically taken by people who need cash urgently or those in financial difficulties.

The prices associated with title loans are high and are considered to be a poor alternative to financing.

How a Title Loan Works

The most popular kind of title loan is one that is a vehicle title loan. In this case, a potential borrower is legally required to own a car in full and then sign that the car title is transferred to an auto loan title company. The loan company will lend as much as 25% of car’s worth to the person who is borrowing, and keep the car’s title as collateral in case in the event of default.

A typical car title loan amounts are $1,000, although they can be more. The standard duration of the loan is between 15 and 30 days, however it could be longer. Borrowers can repay the car title loan with a single payment generally after one month, or repay the loan on a multi-year installment plan. If a borrower doesn’t repay the title loan in accordance with the repayment contract the car could be repossessed immediately at the request of the loan title company. The loan company also has the option of permitting a person who is in default make interest-only payments over one month periods that effectively extend the loan amount for a period of time until it’s repaid.

Special Takes into Account

Title loans could be appealing for people with poor credit or people struggling financially who require quick cash. But, there are high fees that are associated with title loans and, in particular, auto title loans which should give borrowers pause.

Annual percentage rates (APR) on an average car title loan could be up to 300%, and is nearly always higher than the 100% rate. The APR’s high rate can lead to an economic treadmill that borrowers cannot catch up and pay down the loan’s principal. Because of this, the auto title or car title lenders are often called “predatory lenders” because they tend to take advantage of people who require money in urgent situations.

A good example of a Title Loan

Consider, for instance the 500 car title loan that must be paid back within a one month period. The loan has the APR of 240%. This amounts to a monthly rate of 20 percent. With this arrangement the borrower is required to pay the car title loan company $600 interest and principal to pay back the debt. If someone needs urgently to pay $500 and need to pay an additional $100 of interest in one month can cause additional financial hardship.

Consider a $5,000 car title loan which must be paid back in installments of 24 months at an interest rate of 108 percent. In this instance, a 24-month car title loan that has monthly compounding, would cost the lender $7,362.71 in interest charges in addition to the initial $5,000 principalamount, to a total amount of $12,362.71. And this doesn’t include charges.

Other options to title loans

Although titles loans may be a tempting alternative when faced with financial challenges, they usually leave a person in more difficult financial position than they were in before, because of the high interest rates and fees. The world of finance is vast and there are many better alternatives to title loans.

Other options include credit cards, even though they carry high interest rates, they are not as expensive as those in the case of title loans. Before taking on more debt, however, an individual may renegotiate current balance with their credit card or bank businesses. They can also often ask for an extension on their debts from their creditors and may be willing to agree in the short term. Taking out an unsecured personal loan is preferred to a secured loan that requires the borrower to provide collateral. Though loans that are unsecured loans are more expensive in comparison to secured loans because of the higher risk to the lender personal loans have lower rates than title loans.

When you’re thinking about an unsecured loan It’s worth using an online financial calculator for personal use to determine how an interest rate will affect the total interest that will be paid at the end period of loan.

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