What is a car title loan and how to qualify for one?
Are you in need of a short-term loan and are confident you’ll be able to pay it back (with interest) within a month or so? While you could approach a bank for a regular loan, that isn’t always an option for people with a lower credit score or young adults who haven’t had the time to build up their credit score yet.
However, there are ways around the problem, especially if you own your car. If you own a car and need cash fast and are confident about repaying it, you can consider applying for a car title loan.
What is a car title loan?
When you apply for a loan, the lender often asks for something as collateral to ensure that they don’t take a loss if you fail to pay it back. With a car title loan, the collateral you will use is the title of your car. This means that, should you fail to pay the loan back on time, your car will be forfeited to the borrower.
A car title loan is basically a short-term loan with a high-interest rate. In order to get one, you’ll have to take your vehicle to the lender, who will examine the condition of the car. The amount of money loaned to you will depend on your car’s condition – you will usually be loaned about 25%-50% of the car’s value.
How does a car title loan work?
As mentioned above, you will first have to take your car to the loan provider. Once that is done and the lender has verified the condition of the car, they will let you know what value loan they can offer you.
If you are okay with that number, you will have to turn your vehicle’s title over to the lender. Once you do so, they’ll provide you with the agreed-upon money and place a lien against your vehicle. The length of the loan varies depending on the lender, but it is generally a 30-day loan.
Keep in mind that, despite the name, cars are not the only vehicles you can use as collateral for a car title loan. Some lenders will also be willing to accept other vehicles, including boats.
Can everyone get a car title loan?
There are a few considerations to keep in mind when applying for a car title loan.
As mentioned above, one of the most important conditions to such a loan is that you own the vehicle used as collateral outright. If you owe any money on the vehicle, it cannot be used for a title loan.
Another consideration to keep in mind is your state of residence. Some states like Missouri permit these loans, so applying for Missouri title loans is possible for every state resident who owns a vehicle. However, they are illegal in other states, such as New York, and lenders that offer these loans would be breaking the law.
In all, car title loans are banned in 30 states, so it is not possible for much of the country to apply for them.
Why are car title loans illegal in some states?
The reason these loans are often illegal goes back to how they work – not only do borrowers have to repay the principal within a month, but they will also have to pay interest. This interest is generally sky-high, set at 25% per month (or about 300% annually). This means that if you borrow $100, you will have to repay $125 at the end of the month.
Additionally, there is also an additional lien fee charged, which is usually $25. Other fees include key fees, processing fees, document fees, and more, all of which are added along with the principal and interest. These fees can add up quickly, making it challenging for a number of people to repay them in full.
While these loans can often be extremely useful if you’re completely confident that you will be able to repay both principal and interest in time, this isn’t the case for many borrowers. Some organizations, such as the Southern Poverty Law Center, point out that a large number of borrowers are, in fact, low-income earners. These individuals are rarely able to repay their loans, leading to them losing their vehicles.
For lower-income individuals, vehicles are often not only the major asset they own but also the only feasible way for them to get to work. Without access to a personal vehicle, they are often unable to continue working.
Due to this concern, a large majority of the country has made car title loans illegal. Additionally, four states – California, Kansas, Louisiana, and South Carolina – have certain restrictions around the practice.
Qualifying for a car title loan
As mentioned above, a car title loan can be useful in situations where you’re confident about your ability to repay it. For example, if you’ve just been promoted and know your paycheck can help you pay the loan off, a car title loan can give you the resources to buy essential tools for your new job. Then, when you receive your paycheck at the end of the month, you can pay off the loan and reclaim the title of your car.
So, if you’re in a state where these loans are legal, and you believe that you are not at risk of being unable to pay, there is no issue in applying for a car title loan. To qualify for one, you basically only need a vehicle you own outright.
That said, you will also need to have certain documents, including:
- The title of the vehicle, proving you own it
- Vehicle registration and proof of vehicle registration
- Valid government-issued ID that proves that you are the person whose name is on the vehicle title
- Vehicle registration and insurance
- Proof that you will be able to repay the loan on time (usually in the form of pay stubs, though other forms of proof may do as well)
- At least two references, including their names, addresses, and phone numbers
- Keys to the vehicle (should be working)
If you need quick cash and you own your vehicle, a car title loan is a good option to consider. That said, it’s essential that you assess your own ability to repay it before applying for one – if you cannot repay the loan in time, your vehicle is forfeit.