Auto Title Loan
About the AUTO TITLE LOAN
In Delaware and many other states an auto title loan, also referred to as a car title loan or vehicle title loan provides borrowers with an avenue to use the equity in their car to secure a loan with a properly licensed lender. When getting an auto title loan the borrower must permit the title loan company to record a lien on their vehicle. During the term of the car title loan the lender will also hold the vehicle title. The borrower’s car and title represent the collateral for the loan and the vehicles owner can continue to use their auto while the title loan is outstanding. When the loan is satisfied, the lender will remove the lien and release the car title to the owner.
Auto title loans can be easier to get than other traditional loans. Title loans generally are obtainable without a credit check and only limited documentation on the part of the borrower. The vehicles inherent value becomes the primary consideration of the lender, rather than the borrower’s credit history. The trade off for the convenience of a car title loan comes in the form of higher interest rates as compared to more mainstream loan products. At least in part, these less stringent requirements create a higher risk of default, which in turn, demands that the lender charge a higher interest rate.
The speed of cash in hand with a car title loan is a major benefit to the borrower. Most title loans are funded within minutes of approval on loan amounts into the thousands of dollars. Auto title loans are unique in their capacity to provide a borrower with large loan amount in a short time frame without a credit check. Title lenders often complete the process in 30 minutes or less.
Potential auto title loan customers should take care when considering whether or not to proceed. If less expensive loan options are available they need be explored. As with any loan, the title loans payment schedule should be understood by and affordable to the borrower. Finally, the customer needs to be aware that failure to repay the title loan may result in repossession.
The origins of auto title loans can be traced to the pawn industry. In fact to this day car title loans are sometimes referred to as “auto pawn” or “title pawn”. The pawn comparison works but is not entirely accurate. In the sense that the borrower receives a loan in exchange for her property the idea of auto pawning holds up. There is a significant difference however, between a pawn shop and an auto title loan. When a customer agrees to pawn possessions with a pawn broker, the broker keeps possession of the item until the loan is repaid. In addition, loan amounts with a pawn broker tend to reach into the hundreds of dollars. On the other hand, auto title loans allow the borrower to keep possession of their vehicle while the loan is outstanding. And a car title loan often tops out in the thousands of dollars.
Consumers in need of a fast cash loan may seek to leverage the equity in their vehicle with an auto title loan. The rise of the internet and e-commerce has made gathering information about the loan process and even applying online much more convenient than in the past. Most title lenders will require the borrower to visit one of their physical locations in order to verify the autos VIN (Vehicle Identification Number) and to inspect for any existing damage to the vehicle. This is an important part of the appraisal process which is needed to determine just how much equity the borrower has in their automobile.
Auto title loans remain easier to obtain than many traditional loans, but still require some degree of documentation from the applicant. The borrower needs to have a valid driver’s license, a lien free title, current automobile insurance and registration. Some auto title lenders may request additional documentation such as proof of income and proof of residence. Personal references may also be required.
The application process for an auto title loan normally takes only a few minutes and once it is complete the lender will review it for approval. Title loan applications have a high rate of approval since the borrowers equity in the vehicle weighs heavily in the underwriting process. Still not every loan is approved. There can be many scenarios by which a loan applicant is turned down despite the fact that most auto title loans do not require a credit check. Perhaps the auto in question has too many miles or is in poor condition, in which case there simply would not be sufficient collateral for a loan -although some companies will approve these kind of vehicles. Lack of proper documentation is another possible factor in turn downs. Overall, however, auto title loans continue to be fairly easy to get provided one’s application is in order.
The first question many borrowers have regarding auto title loans involves how much money they can be approved to receive. This is generally because the consumer has a specific need in mind when applying for the loan. Emergency expenses, cash flow issues, rent due and even holiday shopping are just some of the reasons given to borrow money. So if the need is nine hundred dollars to pay the mortgage, the consumer understandably will want to know if they can borrow enough to cover the expense. Here again, collateral is the issue.
Auto title lenders generally use a simple formula to determine collateral and in turn, loan amount. Typically the vehicle is appraised for make, model, miles and condition using market standards like Kelley Blue Book ®, Edmunds®, NADA® or other reputable sources. The lender will then base the maximum loan value at some percentage of book value. This percentage can vary by lender. On the low end one could expect to borrow 30% of book value. Most lenders will more likely approach 50% of book value and in some cases even more.
Once the applicant is satisfied that they are able to borrow as much as they need, the cost of borrowing the money is normally the next concern. Determining the expense of an auto title loan begins with the interest to be charged. The lenders disclosures and loan documents should always express this fee as an Annual Percentage Rate (APR). APR information is designed to provide consumers with a basis to compare rates and understand exactly how much interest they are signing up for. Because auto title loans often charge a very high interest rate, lenders sometimes suggest that borrowers look at the actual dollar cost of the loan as opposed to the interest rate. They point out that the interest payable over a short term loan may not cost as much as the impression one would get by simply looking at the interest rate. While this remains debatable, remember that lenders are required to provide APR information prominently in the loan document. Lenders are also quick to point out that with the ease of obtaining title loans (no credit check, limited documentation from the borrower) that such loans have a higher risk of default which justifies the high interest rate. Additional fees vary from lender to lender with some offering no fee loans (exclusive of interest), while others charge a myriad of fees which may increase the overall cost of borrowing.
Once the loan agreement is signed, the borrower receives the funds and continues to use their car. Once the borrower pays off the loan, the auto title lender will release the lien on the vehicle title and return the unencumbered title to the vehicle owner.
In the event that a borrower is late in making payments or cannot make payments at all the lender may pursue various actions. Regarding late payments, lenders have some discretion. Most reputable lenders will observe some grace period for the borrower to make payment. Some may choose to work with customers by waiving fees. Others may be much more aggressive in collection efforts which may ultimately include repossession of the vehicle. Lenders generally seek to avoid repossession if at all possible due to the expenses involved. Nevertheless, any borrower that does not pay their loan may face repossession or other collection efforts.
AUTO TITLE LOANS in DELAWARE
Delaware is one of many states that allow licensed lenders to offer title loans. As defined by statute;“Title loan” means a loan made to one or more natural persons by a licensee and secured by the title to a motor vehicle, which loan is not used for the purpose of purchasing the vehicle that is used as security and which loan has an originally stated repayment period of 180 days or less.
Delaware has a long history in the banking industry and remains home to many multinational firms. The state has no cap on interest rates (known as usury laws), thus permitting the free market to dictate. Delaware’s Office of the State Bank Commissioner oversees the auto title loan industry in the state. Written disclosure as follows;
Another important feature Delaware mandates regarding auto title loans is the right of rescission. A title loan borrower may rescind a title loan for any reason up to the end of the business day following the day on which proceeds of the loan were disbursed to the borrower. The title loan borrower shall not incur any fee, interest, or other charge by exercising a right of rescission, except any fee or charge incurred by the licensee in the normal course of business in connection with the making of the title loan.
Beyond the many State of Delaware laws regulating auto title loans, lenders must also observe federal consumer protection laws. There are literally volumes of applicable statues including fair credit practices, truth in lending, privacy policies, collections and required disclosures.
WHO IS USING AUTO TITLE LOANS
Auto title loan borrowers may come from all walks of life. Various studies have been published from multiple sources seeking to define the demographics of these consumers. While these studies do not necessarily agree on a social-economic profile there are other factors to consider.
URGENT CASH NEED Very often auto title loans are the fastest path to cash in small to large amounts for those in urgent need. Unexpected expenses, medical bills, emergency home repairs, rent or mortgage expense, utility bills and other immediate cash needs number among the many reasons borrowers choose to make use of auto title loans.
NO BANK RELATIONSHIP In many instances an established bank account of some kind is needed in order to borrow money. Traditional lenders tend to be much more demanding in documentation and credit history than auto title lenders. This can make auto title loans more attractive to the unbanked segment of the population.
SELF EMPLOYMENT Self employed persons often encounter the need for short term loans to fund payroll or purchase materials. However, irregular or hard to document income can make obtaining a bank loan difficult and cumbersome. That is why many small businesses and independent contractors seek auto title loan for short term working capital. The speed and ability to borrow fairly large amounts with a vehicle title loan can be a lifeline for these borrowers.
NO CREDIT CARD There are a great many Americans that do not possess a credit card. In some cases they do not qualify. Recent economic conditions have pushed many borrowers, in an effort to control spending and better manage debt, have voluntarily sworn off credit cards. Whatever the cause, without a credit card in a time of need, auto title loans are an alternative for access to short term cash.
NO CREDIT HISTORY Prospective borrowers with little or no credit history often have a difficult time qualifying for many traditional kinds of loans. In the case where they do qualify, the loans amounts can prove insufficient for their current needs. With the relatively large value of motor vehicles the needs issue can be overcome.
INVISIBLE CREDIT NEED Some borrowers simply desire a loan which does not appear on their credit report. One example is a new home buyer. While the mortgage application is pending any new loan appearing on the customer’s credit report may have a negative impact and ultimately could result in non-approval of the mortgage. With auto title loans that do not require a credit check this potential issue is avoided.
The future of auto title loans seems likely to be in the hands of the consumer as they continue to create a strong demand for the product. There are opposing forces fueling debate over auto title loans. Consumer advocates in most states that offer title loans express concerns with the interest rates associated with these and other high interest loans. They seek reform or even abolishment of car title loans. Professionals in the title loan industry counter their arguments by highlighting the fact that when disaster strikes many borrowers simply have no other place to turn for desperately needed cash. They further their defense of the interest charged by suggesting that the short term nature and high risk factors inherent with title loans justify the rates. The state governments involved are left to try and strike a balance between protecting borrowers without restricting access to the fast cash so many seem to need.
On a national level legislation like The Protecting Consumers From Unreasonable Credit Rates Act of 2009, were considered by Congress to address uncapped interest rates of various short term loans including auto title loans.
A new Consumer Financial Protection Agency (CFPA) is an important piece of The Dodd-Frank Wall Street Reform and Consumer Protection Act. The act marks the first time ever that an agency of the federal government has been granted power to oversee non-traditional credit markets.
Whatever regulatory changes may be forthcoming, the auto title loan industry continues to evolve. As is the case with many businesses, technological innovation has helped to fuel both change and growth. Consumers now embrace the internet, smart phones and whatever the latest advancements provide in order to find lenders, compare rates and submit applications all at a faster rate than ever. For their part, auto title lenders have leveraged information technology to speed processing for an enhanced consumer experience. This trend will almost certainly continue.