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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 to serve as collateral. Title loans are extremely popular because of two main reasons. The first is that an applicant’s credit score isn’t taken into consideration in determining the eligibility for the loan. And second, thanks to the looser requirements for applications that a title loan can be approved quickly for amounts as low as $100.
Key Takeaways
A loan that needs an asset to be used as collateral is referred to as a title loan.
Title loans are popular because they don’t consider the credit score of the applicant, and they are approved very quickly.
The most popular type that is a title loan is one that is a title car loan, where the car itself is the asset put up as collateral.
Title loans are usually taken on by those who require cash quickly or in financial difficulty.
The prices associated with title loans are high and are considered to be a risky financing option.
How a Title Loan Works
The most popular form of a title loan is a car title loan. In this instance the borrower will be legally required to own a car outright and sign it over to an automobile loan Title company. The loan company will loan 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.
Typical car title loan amounts are $1000 but they can be greater. The typical length of the loan is 15-30 days, but it can be extended. Borrowers can repay the car title loan by making a single payment generally after one month, or pay back the loan on a multi-year installment arrangement. If the borrower fails to pay back the title loan according to the repayment agreement, the car can be confiscated from the loan title company. The loan company also has the option of letting a borrower in default pay interest-only for one month that effectively extend the loan amount indefinitely until the loan is repaid.
Special Considerations
Title loans may sound attractive for people with poor credit or people with financial difficulties who require quick cash. However, there are exorbitant costs that are associated with title loans and, in particular, car title loans which should cause borrowers to think twice.
The annual percentage rate (APR) for an average car title loan can be as high as 300% and is nearly always higher than the 100% rate. The high APR can cause the borrower to be on a financial treadmill and can never catch up and repay the loan’s principal. Because of this, car title or auto title lenders are sometimes called “predatory lenders” because they tend to prey on people who need cash in emergency situations.
Example of a Title Loan
For instance, a $500 title car loan that must be repaid within a one-month period and carries the APR of 240 percent. That comes out to an annual rate of 20 percent. Under these terms the borrower is required to pay the title loan company $600 in principal and interest in order to repay the debt. For individuals who need $500 fast and need to pay an additional $100 in interest over one month can create financial hardships.
Consider a $5,000 car title loan that must be repaid in monthly installments over 24 months, with an APR of 108%. In this case an unpaid 24-month title loan with monthly compounding, would cost the lender $7,362.71 in interest costs on top of the initial $5,000 principal, with a total payment of $12,362.71. This doesn’t even include costs.
Other options to title loans
Although titles loans could be an appealing choice when facing difficult times, they can leave a person in worse financial situation than they were before, because of the excessive interest rates and charges. The world of finance is vast and there are many better alternatives to title loans.
Some other options include credit cards, even though they come with high rates of interest but they’re not as costly as the rates for title loans. Before taking on more debt However, a person could renegotiate the terms of their existing balance with their credit card or bank companies. They may also ask for an extension on their debts from their creditors, and they might be willing to comply in the short term. A personal loan is superior in comparison to secured loan which requires one to put up collateral. Though loans that are unsecured loans have higher interest rates when compared to secured loans due to the increased risk to the lender personal loans have lower rates than those offered for title loans.
When considering an unsecured loan, it’s worth using an online financial calculator for personal use to determine how an interest rate will impact the amount of interest that is paid by the end term of loan.
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