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Title Loan

By Julia Kagan

Updated January 15, 2021

Review by Thomas Brock

What is a Title Loan?

The term “title” refers to a loan is an loan which requires an asset to serve as collateral. Title loans are popular for two key reasons. The first is that an applicant’s credit score isn’t considered when determining qualifications in order to get the loan. Second, because of less stringent requirements for application, a title loan is able to be approved quickly, for amounts as small as $100.

The most important takeaways

A loan that needs an asset as collateral is referred to as an asset loan.

Title loans are well-known because they don’t take into consideration the credit score of an applicant and because they can be approved very quickly.

The most popular type of title loan is one that is a title car loan in which the vehicle is the asset that is put on the line as collateral.

Title loans are usually taken on by those who require cash quickly or who are in financial trouble.

The cost for title loans are quite high, and they are considered a bad choice for financing.

What is a Title Loan and How Does It Work

The most commonly used type of title loan is a car title loan. In this instance, a potential borrower is required to own a car outright and sign that the car title is transferred to an auto loan Title company. The loan company can lend as much as 25% of car’s entire value and retain the title of the car as collateral in the event of default.

The typical car title loan amount is $1,000 but they can be higher. The usual duration of loan is 15-30 days but can be longer. Borrowers can repay the car title loan with a single payment usually after a month, or pay back the loan through a multi-year installment plan. If a borrower doesn’t repay the title loan in accordance with the repayment agreement, the car can be repossessed immediately by the auto loan Title company. The loan company may also consider letting a borrower in default pay interest-only for one month periods which effectively roll over the loan amount for as long as it takes until it’s repaid.

Special Takes into Account

Title loans may sound attractive to individuals with bad credit or people with financial difficulties who require quick cash. However, there are hefty fees related to title loans, especially auto title loans which should cause borrowers to think twice.

APR: The rate of annual growth (APR) on an average title car loan could be as high as 300% and is nearly always greater than the 100% interest. The higher APR could lead to a financial treadmill where borrowers cannot catch up and make the loan’s principal payment. For this reason, car title or auto title lenders are sometimes called “predatory lenders” because they tend to take advantage of people who require money in urgent situations.

An example of a title loan

For instance the $500 car title loan that is to be repaid within a one-month period and carries the APR of 240 percent. This amounts to 20 percent. With these terms the borrower is required to pay the title loan company $600 interest and principal to pay back the loan. For individuals who need $500 fast, paying an additional $100 of interest in a one-month period may create financial hardships.

Or consider a $5,000 car title loan that has to be repaid in 24 monthly installments with an APR of 108 percent. In this case, a 24-month car title loan with monthly compounding, will cost the applicant $7,362.71 in interest costs on top of the initial $5,000 principalamount, for a total payoff amount of $12,362.71. That’s not even including charges.

Other options to title loans

While title loans may be a tempting option when going through financial challenges, they usually leave a person in worse financial situation than they were in before, because of the charges and high rates of interest. The world of finance is vast and there are a variety of better alternatives to title loans.

There are other options, such as credit cards, though they carry high interest rates however, they’re not as high as those for title loans. Before taking on further debt one can renegotiate their current balance with their bank or credit card firms. They may also request an extension of the amount of their debts with their creditors, and may be willing to accept for a short time. A personal loan is preferential in comparison to secured loan which requires one to secure collateral. While the unsecured loans are more expensive in terms of interest in comparison to secured loans because of the higher risk to the lender, personal loans have lower rates than those offered for title loans.

If you’re considering an unsecure loan It’s worth using a personal financial calculator to determine how an interest rate will affect the total interest due at the conclusion period of loan.