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How Car Title Loans Work

Car title loans are one of the easiest ways to get some cash when you are in urgent need of money and own a car, but that doesn’t mean you know how title loans work.

These loans are fast and impose fairly simple and straightforward terms and conditions. A good part about car title loans is that they can cover the smallest cash needs from a $100 to larger loan requirements of up to $50,000.

If you are wondering how title loans work, here is everything you need to know. From what they are, to what the eligibility requirements are for these loans, to why you should choose them.

What is a Car Title Loan?

Car title loans are short term loans to take care of immediate cash needs. These loans come with a high interest rate as compared to traditional loans. However, the interest that you pay is actually lower because these loans are for extremely short periods like 30 days or less.

Car title loans are secured loans where you offer the title of your car as collateral. You can get a car title loan even with a bad credit score because of this.

Traditional lenders like banks or credit unions find it difficult to look past a borrower’s credit history. Their approval process is stringent and time consuming. This is why car title loans are preferred by most borrowers to cover a cash emergency.

How Title Loans Work

If you are wondering how title loans work, the good news is they are quite simple to understand. The way title loans work is that the lender makes a quick appraisal of the vehicle based on its make, model, year of purchase, current condition, and mileage. There are a number of databases such as the Kelley Blue Book which are used by lenders to come to a fair valuation.

Your loan amount is based on this car valuation. Typically, a lender offers 30% – 50% of the car value as the loan amount. The difference is saved to cover repossession costs, storage costs and any other finance charge in the event of a loan default. Your credit score is not considered a factor during the approval process.

However, you can get better interest rates with a good credit score from some car title loan lenders. You can also get better loan terms if you prove that you are a good risk with optimum repayment capabilities.

Once you agree to the loan terms, the lender will either give you the loan amount in cash or transfer it in your bank account. One great aspect about how title loans work is that the whole process does not take more than 3 days and can be completed in as quickly as 30 minutes.

Moreover, the lender will add his name to the car title you use as collateral. This will be removed cleanly once you pay the loan in full. Contrary to popular belief, car title loan lenders prefer getting their money back, rather than having to repossess your car.

To this effect, they offer roll-overs or loan extensions where your current loan balance is rolled over into a new loan if you are unable to pay it when the loan becomes due.

This is one of the best aspects about how title loans work compared to one another type of loan similar borrowers may consider. Unlike car pawns, car title loan lenders do not require for you to keep your vehicle in storage. You can drive away in your car as normal and use it regularly without any interference from the lender. In fact, a lender will not require possession of your car even if you ask for a loan extension.

However, you need to make sure that you pay your loan on time because car title loans are essentially secured loans. A lender is within his legal rights to repossess your car.

How title loans work state to state are strictly regulated by state. There are many states that have put a limit on the amount you can borrow and the interest rate a lender can charge.

Some states have also put a limit on the number of times a car title loan can be extended. Hence, it is recommended that you understand the various regulations that apply to your state.

What is Required to Take Out a Title Loan?

Car title loans are not time consuming processes like conventional loans. All you need is a government issued identity proof like a driver’s license, and a free and clear title to your car. You should not have any loans or liens on the vehicle.

There are a few title loan lenders who will give you a loan even if you have installments left on a standard car loan.

However, every lender requires the title to be in the name of the borrower and registered in the same state as the loan application. That’s just how title loans work no matter what state you are living in.

If your vehicle is co-owned, then you will need the other owner’s signature on the application form as well. However, you can skip this step if there is an ‘or’ or an ‘and/or’ between the two names on the car title.

Some states also require car title loan lenders to establish the repayment capabilities of a borrower. This means that you need to prove that your income is enough to cover the loan amount.

A lender may ask you for proof of income. Your recent pay stubs should take care of this. Again, this is not a requirement in every state and you should understand the rules that apply to your state. Depending on how title loans work in your state or with a specific lender, you may be able to use proof of disability, pension, even unemployment as proof of income.

A lender may also request for a proof of current residence. This can be in the form of utility bills, credit card bills or even a local magazine subscription. Some lenders need evidence of insurance coverage and installation of starter interrupt device or GPS.

Why Should You Get a Car Title Loan?

There are a number of reasons why a person should get a car title loan. You could be in need of urgent cash and not have the time to wait for traditional loans to process.

For instance, a medical emergency requires instant payments. These loans can be helpful even when you have a bad credit score because traditional financial institutions might not be an option.

You can even use car title loans to rebuild or repair your credit score. Title loan lenders are required to submit your repayment reports to the credit bureaus.

Another reason why car title loans are preferred is that there are no restrictions on the use of money. You can utilize them towards paying your medical bills or even paying for that vacation you always wanted.

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