What is a title loan?
What is a title loan?
Each day thousands of Americans are seeking loans. In their search, many of them discover a financial product known as a title loan. But either they have never heard of it or they have a very limited understanding of how a title loan can prove to be a benefit. Still others may overlook the fact that, like other loans, a title loan is not without risk. So exactly what is a title loan?
Firstly, a title loan may be known by any number of names. Car title loan, auto title loan, auto equity loan or pink slip loan are some common variations. The basic mechanism, however, is the same. A consumer is able to borrow money by pledging their vehicle as collateral. So then the name title loan is derived from the way the loan works. The lender places a lien on the vehicle and holds the title until the loan is repaid. The borrower gets the proceeds of the loan and is able to continue using their car.
In simplest terms, a title loan may be thought of as refinancing your car.
One advantage of a title loan is that vehicles which traditional lenders would flat out refuse to lend money against, like those more than just a couple of years old, or with higher mileage, may be considered for a title loan.
Qualifying for a title loan is often much easier than other types of loans because the borrower may have substantial equity in the vehicle being pledged. Depending on the lender, the applicant’s credit history may not even be a factor. The speed with which one can get cash from a title loan is also customer friendly. Many times there is only minimal documentation involved and the entire process, from completing the application to getting the title loan, can be handled 30 minutes or less.
What then is needed to get a title loan? The requirements may vary with each lender. Generally speaking, a lien free title in the borrowers name is an absolute. A valid driver’s license, insurance and proof of income are also standard. Some companies won’t request much beyond that. Of course others may be more stringent for title loans.
What is the cost of title loan? There are a number of things to consider when analyzing the cost of a title loan. Certainly the interest rate is germane. While it is true that a title loan normally will carry a high interest rate, one must examine why these loans are so popular. They offer almost anyone owning a vehicle a way to get a large sum of money very quickly. So then, the lender is taking on a higher risk. This almost always means a higher interest rate. Bear in mind too that with shorter term loans, the lender must have a high enough rate to recover their costs.
Sometimes overlooked is the fact that even a high interest title loan can be cost effective. If the choice is between paying one title loan or paying late fees, overdraft fees, utility re-connection fees and other unnecessary charges, it is clear that properly used, a title loan can be beneficial.
One should never consider a title loan without the ability to repay however. This may result in a repossession of your vehicle and possible loss of equity as well. There are credit counseling services and other loan alternatives available for those with more than a short term need.