All loans have pros and cons. Car title loans are no different and have some pros and cons that are unique to these types of loans.
This means there are both advantages (pros) and disadvantages (cons) to getting a car title loan.
This article details the title loan pros and cons, and, perhaps just as useful, how to mitigate most of the cons associated with car title loans should you choose to move forward with one.
Additionally we cover what many articles don’t, the title lender and specifically how the choice of lender will affect how significant the cons associated with the loan will be.
Perhaps the biggest factor related to mitigating the cons associated with car title loans is the title lender. First, we need to answer the question ‘what are car title loans?’
What are Car Title Loans?
Car title loans are a fast and easy way to borrow money by using your vehicle’s equity as collateral for the loan. They are a type of fast loan that does not require a good credit score.
Simply put, you borrow money, fast, against the equity in your vehicle. The lender keeps your car title until you make your final payment.
The ability to get cash quickly with fewer requirements has made car title loans an option for consumers without other credit options or without the time to wait for other loan types to be approved.
Car Title Loan Pros and Cons:
First, we’ll detail the pros (advantages) related to car title loans. These are benefits that may make a car title loan a valid choice.
Following the pros, we’ll cover the cons (disadvantages); and more importantly, how to reduce or mitigate them. Finally, we’ll discuss how some title lenders operate and provide some tips for getting a title loan.
Car Title Loan Pros:
Many articles you find online related to car title loans focus on the negatives and sometimes the extremes. These are important to be aware of and also understand.
There are, however, some positives associated with title loans which make them viable choices for some consumers. Title loans do include some advantages over other types of loans and alternatives.
This assumes you find a reputable lender, which can be a difficult process. We’ll provide some tips about finding a trustworthy and reputable title loan company following the list of title loan pros and cons.
Title Loan Pro 1 – Speed: Title Loans are Fast
Car title loans can be obtained quickly, often the same day and sometimes in as little as 30 minutes. For those that need to borrow money quickly this is a significant benefit.
Other traditional loans can take days or weeks to process and fund. Worse, you may spend days or weeks only to be denied the loan and have to start back at square one.
Some online title loans can also take days and sometimes weeks to fund depending on the lender and how well you prepared for the loan. This is a bit ironic since many of them are advertised as instant online title loans.
If the time to fund is important to you make sure to verify with the lender the actual time it takes from the time you apply to the time your loan is funded. Many lenders can do this fast, but not all.
Delays with online title loans are often related to the borrower not having all of their information ready at the time of application. If you are looking for a fast or instant title loan make sure to remember this.
You can avoid this by making sure you meet the title loan requirements and have all of your information in one place. We cover this and more in our guide on how to get a title loan.
Title Loan Pro 2 – Convenience
Title loans are very convenient. They are generally easy to apply for, be approved for, and complete. As long as you have the paperwork needed you can get a fast title loan simply by visiting a local lender with your vehicle and documentation.
The addition of online title loan options has increased convenience. It is now possible to get a completely online title loan with no phone calls, no inspection, and no store visit.
This means the entire process can be completed online without the need to leave your home making them very convenient. Additionally, title loan requirements are fairly straightforward and easy to understand.
There is often no credit check and the loan is secured by your vehicle. This allows them to be completed quickly without the inconvenience of submitting an application and waiting a long time for a decision.
Title Loan Pro 3 – No Disruption: You keep driving your car
Another title loan pro, or benefit, is you get to keep driving your car. With a title loan you retain ownership and use of your vehicle, so there is no disruption to your regular form of transportation.
Unlike pawning the vehicle and leaving it at the pawn shop, a title loan allows you to keep driving your car.
Make sure you read the title loan agreement in detail to ensure you are not required to purchase any additional vehicle warranty or roadside assistance products that may be unnecessary. This ties back to finding a reputable lender which we’ll cover in a bit.
Title Loan Pro 4 – No Credit Check: Multiple Advantages
Many title lenders do not check credit scores or pull credit reports. This means no hard inquiry on your credit report and perfect credit is not required to get a car title loan.
This is important to those looking for a loan without perfect credit. Most, if not all, other loans will require a credit check. You can usually get a title loan with no credit check, although some title lenders do check credit so make sure you confirm this with your lender first before applying.
Even if the lender does perform a credit check it is still possible to get a title loan with bad credit. The loan is secured by the vehicle, so credit is less important than the value of the vehicle. This does mean your car can be repossessed if you default on the loan, which we cover as Title Loan Con number 4.
Car Title Loan Cons:
Like all loans, car title loans have cons. There are number of disadvantages when compared to other loan types that you should take in to consideration. Title loans do have a negative stigma attached to them, and unfortunately these stigmas do not come out of thin air.
Some title loan companies have earned their negative reputation by charging very high rates and treating their customers poorly. It is important to note that they are not representative of all title loan companies.
Some of the disadvantages are inherent to the type of loan, and some can be mitigated by finding a reputable lender. Car title loans are often compared to Payday loans; even though the two loans are very different.
Unfortunately, the industry does have a reputation for taking advantage of consumers with few options, and squeezing every dollar they can out of those who can least afford it.
We’ll provide some tips on how to avoid lenders that may be using these types of tactics.
Fortunately, there are other title loan companies in the space now providing competition for the more expensive lenders. There are options for consumers to choose from and knowing you can walk away from a loan is
Title Loan Con 1 – Very High Interest:
Car title loans often have high interest rates, especially when compared to some other types of credit. Some lenders charge very high interest rates, meaning rates over 100% APR. In some cases rates can be as high as 300% APR.
It is important to understand how much a very high interest loan like this will cost to repay. Remember the loan is secured by the vehicle so ability to repay the loan is important.
As an example, a 12 month loan for $2,000.00 with a 160% APR will cost over $4,600.00 to repay. You will need to ask yourself is it worth paying $4,600.00 to borrow $2,000.00?
It is not uncommon for title lenders to charge 160% or more.
Title Loan Con 2 – Excessive Fees:
Some title loans can have excessive fees ranging from loan origination fees, lien fees, late fees, processing fees, and others. In some cases the fees can increase the loan repayment amount significantly.
Again, this is why it is important to read the loan agreement and understand the fees associated with the loan. Make sure to ask questions if you don’t understand what is detailed in the loan agreement.
Title Loan Con 3 – Aggressive Collection Tactics
This is rarely mentioned by the lender, and some states have laws preventing some of the collection methods some title lenders use, but before getting a title loan it is important to understand what they are.
When you apply for a title loan, the lender may ask for your work address and phone number. Additionally they may also ask for several phone numbers and addresses of references.
Be aware that some lenders have been known to contact your employer and references in an attempt to collect a late payment. Not all lenders follow these practices, so be sure to ask when applying for the loan.
Title Loan Con 4 – Repossession: Your car can be repossessed
A default on a title loan can result in repossession. One of the title loan myths is that lenders would rather repossess your car than have you make the payments.
If your vehicle is repossessed this obviously causes a problem. To retrieve your car, you will likely have to pay the loan in full, plus outstanding interest, fees, and repossession costs.
In some cases this may be more than the car is worth, as the interest and fees may be extensive. Additionally, depending on the laws in your state you may or may not be entitled to the surplus, if there is any, following the sale of your vehicle.
If you decide to get a title loan, make sure you can afford the payments to avoid this situation.
How to Mitigate Cons:
As discussed car title loans have pros and cons. The cons are negative and you will want to either avoid, or mitigate (reduce) the effect of them on your title loan experience.
The good news is every con we have mentioned in this article can be mitigated to some degree.
The single biggest way to mitigate the cons (disadvantages) related to a title loan is to find, and do business with, a reputable title lender that treats their customers fairly. Take your time and choose a lender you are comfortable with.
Mitigating High Interest Rates:
To mitigate the title loan con of high interest rates, find a lender that charges a reasonable rate. Despite what most title lender competitors publish, not all title loans are 300% APR.
In fact, many online title loans are monthly installment loans with rates much lower. Cheaper title loans are are available from several title loan companies.
So, what is a reasonable rate for a title loan? The reasonable rate will depend on the benefit received and should result in an affordable title loan payment.
If you cannot find a loan you can afford, do not get a title loan.
Mitigating High Interest Rates part 2:
The second part to mitigating the cost of high interest rates is shortening the loan term. The longer the loan term, the more interest you will pay. This increases significantly as the interest rate increases.
The difference between a 12 and 36 month loan, when the interest rate is high, is drastic. Use the car title loan calculator to compare and contrast different loan lengths
We recently published some examples in our posts about car title loan costs. Repay your title loan as soon as possible to keep your total costs as low as possible.
Mitigating Excessive Fees:
This mitigation strategy is the same as the previous. Find a decent lender that is direct and upfront about their practices. Make sure they do not charge excessive fees.
Even better, find one of the top title loan companies that charge no fees.
Mitigating Aggressive Collection Tactics:
Again, choosing your lender will mitigate this risk. Some lenders are known for aggressive collection tactics, some are not. Finding a reputable lender will help determine how they collect.
Finding a reputable lender used to be as simple as reading their reviews online. The lenders with poor reputations had enough poor reviews with customers complaining about excessive interest, fees, and aggressive collection tactics including visiting their employer.
Unfortunately, some lenders found a way around this. Now they persuade customer to leave a review online at the time of the loan funding, before the customer has had any real experience with the lender.
By the time the borrower deals with the lender and makes a few payments, they have a better idea of how the lender operates but cannot go back and change their review
Fortunately, there are still a few ways to find a lender’s reputation. One is Ripoff Report. Simply visit them and search for the lender, and read the reviews. Another is the Better Business Bureau.
Read some of the reviews from these sites to find out if your local lender is reputable.
If you find a lender that charges a reasonable rate, no or low fees, and provides decent customer service, you will have significantly lessened the impact of the negative factors related to a title loan.
Title loans have pros and cons just like any other loan. In some cases, the pros outweigh the cons. In other cases, they do not. Even the best car title loans can be expensive, so always explore alternatives.
Make sure to weigh the costs and benefits before getting a title loan. Also, choose your lender wisely and no matter what read the loan agreement in full before signing.