Car Title Loans

A car title loan is a loan where the vehicle itself is provided as collateral to the lender. These loans afford borrowers the opportunity to acquire short-term cash in as little as fifteen minutes. Unfortunately, this speed and convenience comes at a cost to the consumer.

In this publication, we're going to discuss the topic of car title loans. Also known as car collateral loans, title loans, and pink slip loans, we'll talk about the predatory lending practices that sometimes accompany these loans. We'll also discuss some of the practical alternatives to borrowing money via title loans. But first, we're going to talk a bit about the structure of these deals.

Car Collateral Loans

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The names on these loans can be misleading because lenders may provide borrowers with access to the equity they have not just in cars, but in other motor vehicles too. For example, a lender might write loans for cars, trucks, jet skis, boats, and even motorcycles. Typical borrowers are looking for a quick source of relatively small sums of money to borrow over a relatively short timeline.

These loans are often sought by borrowers that have a bad credit record or a poor credit score since lenders usually do not consider this information prior to writing the loan. The primary concern of the lender is the amount of equity the borrower has in the car. Most lenders require the borrower to hold the title to the car, while a smaller number of lenders will provide loans even if money is still owed to creditors.

Structure and Process

The loans are considered very short term, and targeted to individuals in need of immediate cash. Borrowers may be qualified in as little as fifteen minutes and the amount borrowed may start as low as $100. The first payment on the loan is usually due in as little as 15 days after the money is received from the lender.

Car title loans will carry higher interest rates than more traditional loans because lenders do not check the applicant's credit history and rely on the equity in the car as collateral. Lenders will generally offer borrowers the opportunity for loans up to 50% of the car's resale value.

Payments on loans often resemble balloon mortgages, where the borrower is only responsible for paying the interest on the loan each month. These are sometimes referred to as interest-only payments. Under these conditions, a final payment of the loan's outstanding principal is due at the loan's termination, or the balance owed is rolled over into a second loan.

State laws usually prohibit lenders from charging prepayment penalties and limit the number of times a loan can be rolled over.

Loan Documentation

The loan process starts by having the borrower complete an application as well as provide documentation such as:

Proof of residence (name and address on a utility bill is usually sufficient)
A copy of a valid driver's license
A copy of last year's income tax return
Proof of the income source identified in the application (pay stub)
A copy of the car's title (also known as a pink slip in California)
A copy of the car's registration
Proof that the car is insured

Since the loan is secured by the car, they are frequently marketed to consumers that have declared bankruptcy. Lenders are less concerned with the borrower's credit score then they are with the overall condition and value of the car. If the borrower defaults on the loan, then the lender has the option to repossess the vehicle.

Title Loan Fees and APR

The fees charged on a collateral loan are unusually high when compared to those charged on a more traditional loan. Agreements may provide for:

Processing Fees - such as charges related to the processing of an application
Document Fees - costs associated with the collection and inspection of documentation provided by the borrower
Delinquency Fees - these are late fees on outstanding balances where the periodic payment is received after its due date
Return Check Fees - a charge related to the processing of checks that are returned unpaid
Reimbursement of Expenses - these are reasonable fees related to services rendered in connection with the loan. For example, a fee may be charged to inspect the car's condition and / or provide an appraisal of its value

The most problematic area for these loans is the interest rate charged. The Annual Percentage Rate, or APR, on car title loans start around 40% and may be in excess of 500%. As a reminder, the APR on a loan not only includes the interest rate charged on the loan itself, but also the impact of fees.

These high interest rates are the price paid by borrowers for the convenience of having quick access to money. They are also the primary reason borrowers need to aware of the predatory lending practices that can accompany these loans.

Predatory Lending Practices

The term predatory lending is used whenever a lending practice is considered unfair or abusive to the borrower. This can also include situations involving fraud, aggressive sales strategies, charging excessive fees, or inducing the borrower to refinance a loan.

You help to protect yourself from these practices by remaining an informed borrower. Ask questions about fees and penalties. Be on the look out for unnecessary add-ons such as insurance policies. Make sure you read all documentation thoroughly and understand the interest rate charged on the money borrowed - stated as the APR. Find out if the monthly payments will change over the course of the loan. Finally, shop around so you're sure to get the best deal on your loan.

Alternatives to Car Title Loans

If you're in need of cash, then there are some viable alternatives to car title loans. Ideally, you'd never want to put yourself in the position of borrowing money that's carrying an interest rate of 40 to 500%. Before borrowing via a title loan, consider the following options:

Home Equity Loans - while these loans use your home as collateral, they are structured to help pay for costs such as medical expenses. Interest rates on a home equity loan will be more reasonable than a title loan.
Household Budget - keep in mind that you always have the option of living more frugally. Creating a household budget is a great way to monitor your household's expenses and discover ways to save money each month.
Credit Unions - if you're a member of a credit union, these financial institutions tend to provide better service to their members, and are usually committed to helping improve the financial health of their membership.
Borrowing From a Friend - as painful or humbling as this might seem, borrowing money from a friend is a good choice if you know you're able to pay back the loan. If not, there's a chance of losing a close friend, and that might not be worth the risk.

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