In 2019, 4.8% of US households used some form of nonbank credit. Nonbank credit is a financial service issued by lenders that don’t classify as banks. Auto title loans from title lenders are perfect examples of nonbank credit.
Car title loans aren’t as popular as they used to, as they’re more expensive than bank loans. Still, these types of loans are easier to apply for, with borrowers getting the funds the same day they apply.
This guide will go over how auto title loans work, so read on to learn how it can give you the funds you need today.
What Is an Auto Title Loan?
A car or auto title loan, also known as a title pawn, is a short-term loan that often needs repayment within 30 days. It’s a secured type of loan in which a borrower pledges their vehicle as collateral.
If the car title loan goes unpaid, the lender takes ownership of the vehicle. The lender can then sell the car to recover the principal or the money they lent to the borrower.
How Do Auto Title Loans Work?
Title lenders base the principal amount they lend on the vehicle’s current value. This varies from one lending company to another, but most offer loans amounting to 25% to 50% of a vehicle’s value. For example, if your car’s actual worth is $7,500, the lender may let you borrow $1,875 to $3,750.
Since the basis of the loan is a vehicle’s value, you need to take your car to the lender itself. From there, the lending company inspects your vehicle to assess its worth. If it meets their eligibility requirements, they will give you an offer right there and then.
Their offer should include a breakdown of the total cost of the loan. This depends on the monthly interest charge; it’s legal for title lenders to charge up to 25% a month in some states. This is equivalent to an annual percentage rate (APR) of 300%.
If you agree to the lender’s offer, you only need to sign the contract and receive the money on the spot.
What Are the Requirements for Getting a Title Loan?
Getting a loan through a title lender requires the borrower to be the owner of the vehicle. The borrower’s name should be on the title itself, and the title should be clear and lien-free. This means that vehicles still under a loan usually don’t qualify for an auto title loan.
Borrowers must also be at least eighteen years old and have a verifiable source of income. You can get more information from here regarding the required financial documents.
Although you need to provide proof of income, you don’t have to worry too much about your credit score. Many title lenders accept applications from borrowers with bad credit. So, if you’re part of the 30.9% of US consumers with a subprime score, you can still qualify for a title loan.
Should You Take Out an Auto Title Loan?
Auto title loans are expensive, and you need to pay them back within a month. Failure to do so can result in you losing your ownership of the vehicle.
If you’re in dire need of funds, though, you can still consider applying for an auto title loan. However, be sure to compare lenders first, as you may find one that has a lower interest rate. Also, make sure that you can pay the loan back on time to avoid losing your car.
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