Car Title Loans are often a topic of controversy. They are an important lifeline that helps solve short term financial difficulties for some. For others, they are a spiral of seemingly never ending interest and fees. Those who use them responsibly rely on the needed short term cash to make it through difficult times. For others who do not; they can result in the loss of the vehicle. If you are considering a title loan it is important to understand how they work, what they cost, and the consequences of default. Additionally, you will want to know how to get the best deal on a car title loan and the common pitfalls to avoid. In this article we cover several key title loan topics including:
- How Title Loans Work – Monthly Term Loans and Single Payment Loans
- Title Loan Interest Rates
- Tips for getting the best deal on a Title Loan
- Mistakes to Avoid to save money
- How to level the playing field with a Truth in Lending Statement
How Car Title Loans Work:
There are two high level types of car title loans; monthly term loans and single payment loans. The type depends on what state you live in. Both types of loans are secured by the vehicle; meaning the loans use your car as collateral. If you default on the loan your vehicle may be repossessed. This is just like if you stopped making payments on a secured car loan. If you purchased a new car, missed several payments, the car would likely be repossessed. The same is true with car title loans. Monthly term loans are becoming more popular in many states and make it easier for borrowers to repay.
First, lets take a look at single payment loans:
When you read “How Title Loans Work” articles online most refer to a 30 day repayment period. These are single payment loans. While these are still used in some states, many have moved, or are in the process of moving to, a monthly term loan model. We’ll cover those later.
Single payment loans are a bit different and are usually, but not always, for smaller amounts. You borrow a fixed dollar amount and agree to repay it, usually within 30 days, for a fee. The APR on these types of loans can be significantly higher than monthly term loans. Most people run into trouble with these loans when they rollover the loan at the end of the 30 day period and the fees start to add up. After doing this a few times the loan can become very costly and difficult to repay. If you are considering a 30 day loan, make sure to only borrow what you can definitely repay in 30 days.
Now, lets take a look at monthly term loans.
Monthly term loans work like any other term loan such as a car loan or mortgage, with the major difference being the interest rate. You borrow a fixed amount for a certain term, or number of months, and make equal monthly payments. If the term is 12 months, you make 12 monthly payments. The loan is amortized over the term and payments consist of both principal and interest. To see what the payment looks like for a monthly term loan type title loan use our car title loan calculator. For monthly term loans it is important to make your payments on time to avoid late fees and additional interest charges. Make sure you can afford to make your monthly payment every month.
What is the Interest Rate for Title Loans?
Before you get a title loan you’ll want to make sure to find a lender with an interest rate that is reasonable. Some title lenders charge 300% APR or higher, but not all do. There is growing competition is the space and some lenders have lowered their rates significant to compete. Many, however, have not and still charge very high rates.
The single biggest mistake when getting a title loan is to assume all lenders are the same and go to your nearest lender without finding out their rate. This can be difficult, as many lenders will not disclose their rate. Others advertise lower rates and charge higher rates claiming you don’t “qualify” (bait and switch, more below). Find out what your lender charges and be aware of this tactic.
Tips for getting a Title Loan:
In many cases people get title loans for emergencies when they have no other option. It may be for a family member, medical bill, or any other financial emergency that they need money for quickly. A lot of the time borrowers are very stressed and don’t take the time to read the loan agreement and are just glad to get the emergency taken care of. If they went with a very high rate lender with a lot of fees the loan repayment could end up being a nightmare. The number one tip for anyone getting a title loan is do not rush, get several quotes, and read the loan agreement in full before signing. Here are a few more:
- Find out the interest rate and interest charges
- Understand any fees and penalties (late fees, prepayment penalties)
- Use the Truth In Lending Statement (more below)
- Find out how to make your payments
- Ask how to cure a default (in case you make a late payment)
- Always get a copy of the loan agreement
- Research the company, make sure they are legitimate
- Do not borrow more than you can repay
- Make sure you get a title loan and not a “Lease Back”
What is a “Lease Back”
A Lease Back is where you sell your car to the lender and they lease it back to you for a monthly fee. These types of agreements are not title loans, and in many states are not allowed. The terms of these can be very unfavorable with the biggest difference being you do not own your vehicle anymore. You are leasing it from the lender. Make sure you understand the agreement you are signing and the consequences of missing a payment.
Mistakes to Avoid:
When getting a title loan there are some common mistakes that, if you avoid, will need to a more favorable outcome. These include:
Mistake 1: Rushing through the process.
Perhaps the biggest mistake, with the most consequences, is rushing through the title loan process. This includes the process of finding the best lender. It is critical to find a lender that does not charge extremely high rates. Many title loans are used for time sensitive emergencies, so it is understandable that you want to get it taken care of quickly. This is how lenders get you to sign an agreement that is not favorable. It is human nature to want to move as quickly as possible, but make sure to take a little time when getting a title loan and do a bit of research. It may save you a lot of money and help avoid future problems.
Mistake 2: Focusing on the loan amount instead of the cost of the loan
Lenders are great at getting you to fixate on how much you can borrow versus how much it will cost. Visit title loan sites and you will find “How much Cash can I get?” forms all over the place with no “Title Loan Cost” forms. We provide our costs with our Title Loan Calculator that shows exactly what we charge. Customers like this and some lenders are starting to copy us (literally), only they are using our rate with no fees in their calculators instead of their rate with their fees. If you find another title loan calculator online that shows the exact same results as ours, make sure to double check with the lender. Just because they copied our calculator doesn’t mean they charge the same rate with no fees.
Mistake 3: Don’t believe it until you see it in writing.
Title Lenders have a bad reputation for a reason, many still follow the same business practices that gained them this reputation. Others have developed new,and just as deceitful, tactics to get you to sign an agreement that is not in your favor. This includes “bait and switch”. Meaning they advertise one thing and provide another. Make sure the terms in writing are the same as terms you were expecting.
Mistake 4: Signing the loan agreement without reading it in full.
This is a very common one and for good reason, there tends to be plenty of fine print that nobody wants to read in detail. This is one of those times when it is critical to do so. Remember you are pledging your vehicle as collateral, and there may be fees and other terms in the agreement. Make sure to go through every page and understand all of your obligations completely. If you don’t understand a clause in the agreement ask the lender to explain it to you. If they can’t, don’t hesitate to leave without signing and find another lender. Also, make sure the only payments required are payments toward your loan. Some additional items like a roadside warranty are sometimes added to title loan agreements. We recommend staying away from these as they are often unnecessary and overpriced.
Truth In Lending Statements
The Truth In Lending Act is designed to make it easy for borrowers to determine the actual cost of credit. These statements level the playing field for borrowers that don’t fully understand amortization and it is critical to learn how to read one. Your loan agreement will have a TIL statement on the front page; make sure to read it, it is a great tool for you to use when deciding whether or not a title loan is the right choice. Lenders are required to provide the TIL statement in the same format, easily readable in the loan agreement. Here are two examples, both for $2,000 loans for 12 months. The first is a loan with an APR of 200% and the second a title loan from Fast Title Lenders for 96%.
TIL Example 1 – Most Lenders 200% APR
A TIL statement has four boxes. The first two have thick borders and contain the APR and the finance charge (total cost of interest of loan). The third is the loan amount and the fourth s the total of payments. You can see for the 200% APR loan you will pay over $2700 in interest, and pay a total of over $4700. This is more than double what you borrowed for a year.
TIL Example 2 – Fast Title Lenders 96% APR
Next is a TIL statement is for the same loan with us with an APR of 96% shown below. The total interest you will pay is just under $1200, less than half of the previous loan’s $2700. The total loan payments are just under $3200, much less than $4700. Now that you know how to read a TIL statement make sure to look at the one in your loan agreement before signing. If it costs you more in interest than what you borrowed, it is probably worth thinking twice about. In another post we explain in detail how interest is calculated for title loans.
Tips for Repaying a Title Loan:
- Make your payments on time and get a receipt
- Pay more than the minimum when you can, this will reduce your principal faster
- If you know you will be late with a payment let the lender know
- Avoid rolling over 30 day loans
Nobody wants to get a title loan, they do so out of necessity. Avoid others’ mistakes when considering a title loan to make sure if you end up choosing a title loan it is a short term financial solution and not the start of a long term financial problem. Be smart, do a little research, borrow only what you can afford to repay, and make your payments on time. A good resource from the FTC discusses what you should know about Title Loans.