Taking out any debt is a serious decision that should not be taken lightly. A title loan can be an intelligent choice for borrowers, but there are several considerations to consider before settling on this type of loan. Learn the ins and outs of title loans to determine if this debt is right for you.
What is a Title Loan?
To those unfamiliar with the term, a title loan is a short-term, typically 30-day, loan for a small sum. This loan comes with a higher interest rate due to the shortened repayment period but usually doesn’t have many requirements during the application process. You don’t need to go through a credit check for most title loan applications.
Additionally, a title loan is a secured loan, meaning that the borrower needs to offer some form of collateral as security for the loan. For example, title loans for boats require a borrower to offer up the title to their boat as collateral. When the loan is repaid, the lender will return the title to the borrower, but if you fail to repay the loan, the lender can repossess your boat.
How Does a Title Loan Work?
Understanding a title loan isn’t the same as understanding how the process works. Follow the below six steps to learn what to expect if you take out a title loan:
- A potential borrower determines how much money they need for an emergency expense.
- A borrower contacts the lender to submit for prequalification if applicable.
- The borrower is informed of the offer they could receive, including any interest rate or fee information, along with the amount they’re eligible for
- The borrower selects a lender and exchanges the title to their collateral for the funds.
- Repayment(s) on loans begin.
- The borrower receives the title to the collateral back once repayment is complete in full
6 Considerations When Seeking a Title Loan
While title loans can seem appealing on the surface due to the quick access to cash that can be used for any purpose, there are several considerations to keep in mind before applying:
1. Title loans can come with high-interest rates or hidden fees
There are two primary reasons a title loan will come with a higher interest rate than other types of loans. The first reason is the shorter repayment period associated with a title loan. Considering that a lender makes their money off interest, but title loans only last around 30 days, the lender naturally charges a higher rate so they can meet their bottom line.
However, the second reason that title loans come with higher interest rates or fees is the need for more requirements when applying. Even though the lender has extra security in the form of the title of the collateral, they still can’t be sure a borrower will repay. Due to this, they charge a higher interest rate or add-on fees as an extra form of security.
2. The repayment period for a title loan is shorter than most other loans.
As alluded to above, the repayment period associated with a title loan is far shorter than other lines. While personal loans provide you with two to seven years to repay the loan, title loans only allow you thirty days, on average, to repay the loan in full. Because title loans are usually for smaller sums of money, it’s not an impossible task.
However, due to this shorter repayment time, it’s best to take out a title loan if you are confident you will have access to the cash you need shortly after taking the loan out.
3. You need to own the title to your collateral to take out a title loan.
You can only take out a title loan if you own or at least have equity in the collateral. The risk reduction to the lender only occurs if they know they can repossess the collateral, but if you don’t actually own the title, you cannot trade it in return for the loan.
4. The amount you can borrow is based on your collateral value.
In most cases, the amount you are allowed to borrow when taking out a title loan directly correlates with the current value of your collateral. Most title loans fall between $200-$1,000 on average, but the actual amount you can borrow will usually be between 25-50% of the value of the collateral you offer.
5. You’re at risk of having your collateral repossessed.
While it may seem obvious, it’s important to register that your collateral is at risk to be repossessed and taken away from you permanently if you cannot repay the loan. When taking out the loan, you sign the contract that transfers the title to the lender. If you cannot repay that loan, the lender has no legal obligation to give you the title to the collateral back.
6. Your interest rate may be determined based on your credit history.
While a credit check won’t be used to determine whether or not you get approved for a title loan, in most cases, a lender may still run a soft check to determine the interest rate they offer. Borrowers with lower credit scores or weaker credit histories may not receive a favourable interest rate.
Cover your emergency expenses with a title loan.
If you have an emergency expense on the horizon with a lower cost, yet you don’t have the funds on hand at the current moment, a title loan can help. Considering the short repayment period associated with a title loan, it’s best to only take out this debt if you’re confident you’ll have access to cash to make the repayment soon after. Meet your financial obligations by strategically taking on debt when needed.
