How do Car Title Loans Work?
Car Title Loan Requirements – How car title loans work depends on several factors. Two major factors include:
- The state you live in – different states have different regulations which affect how title loans work.
- The lender you choose – Lenders have different operating models and will affect how title loans work for you if you choose to do business with them.
All car title loans do have some similarities, so we’ll go over those first. Car title loans are secured loans. This means they are secured by the vehicle and the vehicle is used as collateral for the loan. If you are not sure of the difference between an unsecured loan and a secured loan, just remember all secured loans have collateral.
Secured loans include mortgages, which are secured by the property, and car loans, which are secured by the vehicle. Secured loans can include any other type of loan where you have to put up collateral. A loan from a pawn shop is a secured loan using the item you pawned as collateral. If you default on a secured loan, the lender can seize the collateral. In the case of a car title loan or car loan this means the lender can repossess the vehicle.
Unsecured loans include credit cards, lines of credit, and payday loans. These loans are based on your credit worthiness and ability to repay the loan. They do not have collateral associated with them. If you default, the lender will have to try to collect and possibly get a judgement against you.
How Car Title Loans work by State
Depending on what state you live in you may be able to get a title loan with a single payment at the end of a short period (usually 30 days); or a monthly term loan where you make monthly payments for a fixed number of months. How do these title loans work?
Single Payment Loans – Title Loans started out as single payment loans, usually 30 day loans, for a fixed fee or single monthly interest rate. These title loans worked by letting you borrow a small amount and requiring that amount due, plus interest and fees, at the end of 30 days. If you were able to repay the full amount with the fees on time these loans worked ok. The problem with a loan structured like this is there are many borrowers who are unable to repay the full amount, and plus the fees in only 30 days. This leads to “rolling over” the loan by paying only the fees associated and over time the borrower may have repaid more than they borrowed and still owe the entire principal. More on rollovers below.
Monthly Term Loans – If you live in a state that offers monthly term loans these are generally easier to repay. The loan amount is amortized over the period of the loan and you make equal installments each month until the loan is paid in full. A portion of your loan payment every month is applied to the principal loan balance. This means you are reducing your principal each month. A sample loan with a full amortization explanation.
What is a Rollover?
When we are taking about how title loans work a “rollover” is where you extend, or refinance, your single payment loan for another term (30 days in most cases). This is not free, and you will need to pay the fee associated with the loan to roll it over. At the end of the next 30 days, you will owe the amount you borrowed, plus the interest and fees for another 30 day period. If you cannot repay the full amount at the end of the second 30 day period, you may end up rolling over the loan again. The same as the last rollover, you will owe the amount you borrowed, plus interest and fees, at the end of the third 30 day period. This cycle can continue to repeat and months can go by without reducing the amount you owe. Many states now restrict the number of rollovers allowed and some also require a portion of the principal to be repaid.
How Title Lenders Work
Car title loan terms, conditions, and interest rates vary significantly from lender to lender. This makes it very important to choose your lender wisely. Some lenders charge very high (state maximum) rates, have excessive fees, unfavorable terms and conditions, and poor customer service. When you are choosing a lender make sure to look for characteristics that are important to you. These can include:
- How fast the lender funds the loan – Some lenders provide cash the same day, others can take several days or longer.
- Interest Rates and Fees – Obviously you need to know how much the loan will cost you to be able to decide if it is worth it. This can be difficult as many lenders are not transparent and do not disclose their rates and fees. There is, however, a way to level the playing field. It is call a Truth in Lending Statement. Learn how to read one before getting a title loan. You will be glad you did.
- Payment Methods – All title loans require payments. Make sure your lenders accept a payment method that is convenient for you. Some lenders accept only cash, others accept debit cards and online payments.
- Reputation – It goes without saying that you should choose to do business with a company with a good reputation. You used to be able to just read reviews online. Unfortunately many lenders persuade borrowers into leaving a positive review the same time they get the loan, so they are not accurate representations. Take a look at other sources of reviews that were not coerced at the time of loan from sources like Ripoff Report and the Better Business Bureau.
Title Loan Interest Rates
The interest rate associated with your title loan makes a huge difference in the amount you will need to repay to satisfy your loan. The wide range of rates offered by various lenders, including the very high rates charged by the large lenders, means shopping around for a title loan can save you thousands.
We provided a title loan costs guide that shows three different examples of the same loan with different interest rates. You may be surprised at how big of a difference there is between lenders with different rates. If you do not want to get stuck in a loan where you end up paying $6,000.00 to borrow $2,000.00, make sure to do a bit of research before visiting a lender.
How the Title Loan Process Works
The Title Loan Process has some similarities regardless of the lender. It usually begins with an application that asks for some general information about you and your vehicle. When you submit your application, it is reviewed by the lender and you are usually contacted. The next step in the process is to visit the lender and review the title loan agreement. Once you sign the agreement, your loan is funded and you begin to make payments. The title loan process can be summarized in the following steps:
- Visit the Lender
- Complete the Agreement
- Get your Cash
- Make your Payments
- Get your Title Back
Title Loan Payments:
When you are reviewing the title loan agreement it is important to make sure to find out how to make your payments. It is essential to make your payments on time to keep your loan in good standing. Some lenders require you to visit them to make payments in cash or pay by Western Union. This is not convenient for all borrowers, so make sure it is for you if that is a requirement.
Better yet, find a lender that lets you pay online or over the phone so you can do so from the comfort of your own home. Always get a receipt for your payments and keep them in one place in case there is ever a problem with your loan.
Fast Title Lenders Title Loans
We started Fast Title Lenders to provide our customers with a better alternative to the title lenders that lead the industry today. Our business model is relatively simple. Create a Title Loan company that provides customers with the fast access to the cash in their vehicle with terms and conditions that make it easy to repay the loan.