When sudden, unexpected things happen, leaving us strapped for cash, one of the easiest solutions is to borrow money or take out a loan. However, in most cases, applying for loans and getting approved would require a good credit score. So what if you don’t exactly have a remarkable credit rating or have no credit scores at all? If you own a car, you have another option: a car title loan.
Car title loans or auto equity loans (sometimes called pink slip loans or car collateral loans) are short-term loans based on the value of your car. The borrower hands over the title of their car, and the entity that lends the money will become lien holder of your car. You get your cash and still get to drive your car provided that you repay the full amount, along with the fees and interests, on time.
Sounds good, yes? Before you go and get a car title loan, however, here are a few things you need to know.
1. Loan Value
Lenders will appraise your car and they get to decide your car’s “value”. Often, you get 25 to 50% of your car’s value in the loan. Some lending entities will lower the car value if the car is not fully paid or if there are any outstanding loans taken out against the car. Some will even require insurance.
2. Interest Rates
Car title loans usually have an average APR of 300%. This means that if your loan spans a whole year, a car title loan would cost you three times what you borrowed in fees and interest alone. Though this type of loan typically only lasts a month, the high-interest rates would mean that most people could not afford to pay back what they owe in a month’s time. So they choose to roll over their debt to the next month. This typically means that they are charged fees and interests on top of what the borrowers were already charged when they originally took out the loan.
Because you put your car up as collateral, the lending agency will be able to repossess your car should you fail to pay your loan back in full. If you default on your loan, lenders have the right to have your car towed, or even unlock your car and drive away with it, that is if you gave them a spare set of keys when you took out the loan.
4. Credit Score
Your credit score plays no role in whether you get a title loan or not. Because you put up your car as collateral, lending companies do not care if you have a bad credit score. They would just take your car and sell it to the highest bidder if you default on your loan. And since their appraisal of your car is 50% of its actual value, they can make money off of it easily.
A car title loan is one of the easiest, quickest ways to get cash, making it very tempting to turn to your car to get you out of a tight financial situation. You can get a car loan approved within the day, hours even, for some lenders. However, before you take out a title loan, make sure that you actually have the capacity to pay it back within the allotted time or you will risk either losing your car or getting buried in debt from the interest and fees alone.