Consumers who do not qualify for a traditional loan may consider a vehicle title loan. These short-term loans can put cash in your hand but are very risky. Before considering a vehicle title loan, check out this information on how these loans work, the risks, and some alternatives to title loans.
Typically, auto title loans are 30-day loans that require the vehicle owner to hand over their vehicle title to a lender as collateral. The lender keeps the tile of the vehicle, puts a lien on the automobile, and gives you cash. Loan amounts are generally 25 to 50 of the car's cash value. When the loan period is up, you have to pay back the loan and any fees associated with the loan to reclaim your title. This can be risky because you can lose your vehicle if you don’t repay the entire loan.
Vehicle title loans are often expensive. In addition to the amount lent, the loans come with a high Annual Percentage Rate and additional fees such as processing fees, origination fees, document fees, key fees, and other charges. By law the lender must inform you of the cost of the loan in writing before you sign the agreement. The APR is based on how much money you borrow, the monthly finance charge, the fees you’ll have to pay, and how long you borrow the money. Interest rates in states that do not have a cap on interest may charge 25 per month, or a 300 APR.
*Special Note for Military Service Members: Military service members and their dependents are protected under the Military Lending Act. Under the law, the APR is limited to 36.
Should You Get a Vehicle Title Loan?
Before deciding on an auto title loan, think about other options that may be available to you. Consider the following options:
- Contact your creditor and asked for more time to pay your bills
- Apply for a loan from a bank or credit union
- Use money saved up to handle your financial needs
- Speak with a credit counselor for debt management options
- Borrow money from friends or family
- Check your local charities, churches, and community centers for financial help and resources
- Use a credit card instead
Choosing a Lender
If after considering these alternatives you still believe a title loan is right for you, carefully select a lender. Start by reviewing the company. Check out their Reputation Report for complaints, reviews, and background information on the company. Search the business's name online for any additional information that can help you make an informed decision. Take time to compare lenders; don’t just go with the first option that comes up. Compare the cost of the loan between lenders. Ask the following questions:
- What is the APR?
- What are the fees?
- When must I repay the money?
- What happens if I cannot repay?
Check with your state attorney general or state regulator about title lending laws in your state and any licensing requirements. Many states have consumer laws that help protect against these types of risky high cost loans. Verify that the business is licensed if that is a requirement in your state.
Be Prepared
In general, to obtain a title loan, the borrower must own the vehicle and there can’t be any liens against the title. Lenders may require you to provide some of the following to obtain the loan:
- Original title showing ownership
- Government-issued identification, such as driver’s license, matching the name on the title
- Proof of residency matching the information on the title
- Current registration and insurance information
- Recent pay stubs, proof of income, or something showing your ability to repay the loan
- Two valid references including names, phone numbers, and addresses
- Working copy of the key to the vehicle
Only borrow what you can reasonably afford to repay. Read the entire loan agreement before you sign. Check for any additional fees, costs, or requirements that may not have been discussed verbally. Some fees to look out for include late, returned check, or rollover fees. Also, keep in mind that some lenders require GPS tracking to be placed on the vehicle in case the loan isn’t repaid and they have to repossess the automobile.
Additional Help Dealing With Lender
These types of high cost, high-risk loans are often associated with dishonest lenders. To report fraud or if you believe a lender is acting dishonestly, file a complaint. You should also report them to your state attorney general or state consumer protection office, and the Federal Trade Commission.
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