Car title loans are often a topic of controversy and are not permitted in every state. This does not mean they don’t serve a purpose, and not talking about them does not help those borrowers who seek them out.
Instead of avoiding the topic, we think it is better to provide current and factual information about car title loans. This will provide those considering one of these loans with the information needed make a better and more informed decision.
Just like every other type of loan, car title loans have both advantages and disadvantages. This article will focus on these and explain each one in detail. Finally, we’ll explain how to minimize and/or avoid the disadvantages should you choose to get a title loan.
Car Title Loan Advantages
There are several advantages to title loans that make them attractive to borrowers. There is a few main reasons people turn to title loans during certain situations. These main advantages include:
- Speed – title loans are fast
- Ease – title loans are easy to complete and convenient
- No Credit – credit score is not as meaningful
- Online options – can be completed online
In addition to these three major title loan advantages there are some other minor advantages like flexible repayment schedules, multiple payment methods (depending on lender), and help rebuilding your credit (again depending on lender). Now we’ll better describe each one the three major advantages.
Speed – Car Title Loans are Fast
The first advantage is car title loans are fast. This is especially true when compared to some other loan types. Title loans can be completed in person in as little as 30 minutes for same day title loans. Completely online title loans can be done the same or next day. This is very fast for a cash loan.
Ease and Convenience
Car title loans are easy and convenient. One of the reasons for this ease is they use the vehicle to secure the loan. This means the lender takes a security interest in your car in exchange for making the loan.
The fact that the lender has this security interest means the underwriting process in comparatively easier than an unsecured loan.
You can complete a car title loan very fast with just a small amount of paperwork. We do, however, highly recommend preparing for the loan. This will help ensure you choose the right lender.
The right lender can make the difference between a great title loan that solves a short term problem and a very expensive title loan that causes a long term problem.
No Credit Needed
Because title loans are secured by the vehicle it is possible to get a title loan completely online with no credit check. This is a major advantage for vehicle owners without great credit.
Unlike unsecured loans that are based primarily on credit score, title loans are based on vehicle value. As long as your car has value, you can usually borrow money with a title loan.
Car Title Loan Disadvantages
Car title loans also have disadvantages. Perhaps one of the main disadvantages is that they are not available in every state, making it difficult to standardize. Additional major disadvantages include:
- High interest rates – relatively costly when compared to other forms of credit.
- Secured by the vehicle – default can result in repossession.
- Some lenders charge fees – depending on the lender fees can get expensive.
- Difficult to find a good lender – advertising can be misleading.
Most of the disadvantages can be minimized by finding a straightforward, direct, and reputable lender. One of the major problems with title loans is the prevalence of lenders that treat customers poorly and charge very high rates.
We have all heard the stories of a bad encounter with a title lender. The next sections further define each one of the main disadvantages.
High Interest Rates
Title loans can have high interest rates and be expensive. This is a fact, not an opinion. The question is how expensive? Some lenders charge very high interest rates. For a very short term loan, like a title loan in Miami, this may not be significant, however, for a loan longer than 12 months the cost can get excessive if the rate is high.
In some cases it can cost over five times the principle amount to repay the loan. This is especially true if it is a high interest loan amortized over several years.
What lenders hope for is that you focus on the monthly payment and don’t look at the total loan cost. Always look at the total loan cost and make sure it is reasonable. Take a look at some examples of what title loans actually cost.
Secured by the Vehicle
Title loans are secured by the vehicle. While this can be an advantage in some ways it is also a disadvantage. This means that if you default on the loan then the lender may repossess the car.
They will do this to recover their costs. This could mean losing your vehicle and, depending on the state, you may or may not be entitled to any surplus from the lender selling the vehicle.
Lender Fees
Car title loan fees can range from processing fees, late fees, lien fees, prepayment penalty fees, and various other fees. These can get excessive if you don’t pay attention to them.
Make sure the lender you choose does not charge a fee for getting the loan or a fee for prepaying the loan. Because of the high interest of title loans you should always have the option to repay the loan in full at any time without penalty.
Difficult to Find a Good Lender
The final major disadvantage of car title loans is the difficulty finding a good lender online. Unfortunately it is hard to tell which lender is reputable and which is not. This is where finding the best title loans pays off.
Reviews used to be a good way to tell how a company treated its customers, but today there are so many biased reviews that they really can’t be trusted. This is the case with both products and services unfortunately.
If you happen to know someone that has dealt with the lender this may be the best way to tell. If not, spend some time on a lenders website and see if the information provided is realistic, helpful, and not full of outlandish advertising claims.
How to Minimize Disadvantages
Finally, when moving forward with a car title loan it is important to try to minimize the disadvantages as much as possible. The best way to minimize the disadvantage associated with a title loan is to find and choose one of the best title loan companies. This will help with:
- High cost – the best title loan companies charge fair rates resulting in a lower cost.
- Repossession – the best title loan companies make it easier to repay the loan and will work with customers that default on the loan. Getting them back on track is preferable to repossession.
- Fees – the best title loan companies charge minimal fees with no prepayment penalties.
Summary
Car title loans have plenty of advantages and disadvantages. They are a specific type of loan that should be used for a specific purpose. Title loans are not long term solutions and should not be taken out to try to solve long term financial problems. The disadvantages associate with title loans can be minimized by taking the time to prepare and choose one of the best title loan companies.