When they are in need of money in a hurry, a lot of people turn to title loans as a possible solution. If you are having financial difficulties at the time but still want something that is less expensive than you are able to pay for, then a title loan can be just what you are looking for. Before making any financial decisions, it is essential to read up as much as you possibly can about title loans. You will then be able to make a choice based on accurate information, and be knowledgeable of what to anticipate. In light of this, here are some important things that you should know about title loans.
What Are Title Loans?
The distinction between a secured loan and an unsecured loan is the foundation for understanding title loans. To get a secured loan, you must pledge an item of value as collateral. While there is no need to put up collateral when taking an unsecured loan, the interest rate will likely be higher.
When you get a title loan, you put up the title to your vehicle, truck, or motorcycle as collateral for the loan. You must be the only owner of the vehicle and be in actual possession of the title in order to exercise this choice. In the US, it is still possible to get a loan if you have a small number of remaining car payments and sufficient equity on your vehicle, however, in Canada, you must own your vehicle completely. The average loan amount for a car title loan is less than $10,000 in the United States, and in Canada, you may be qualified to borrow up to $15,000 for a car title loan. The terms are often quite brief. These loans are secured, but the high-interest rates and other costs make them prohibitive for many borrowers. When you default on a title loan, the lender might take your car as payment.
How Do They Work?
Although the concept of a title loan may seem daunting, there is nothing to worry about. The process of title loans in Canada may differ slightly than the process of title loans in Alabama or Florida which also differ in certain ways, but the point is the same. A lender application is what you'll fill out when you are ready to apply. In addition to your photo ID and evidence of insurance, the lender will want to see the title of your vehicle and the vehicle itself. The United States may ask you to place a tracking device on your vehicle or provide an extra set of keys. The amount you may be able to borrow through a title loan is determined by both the value of your vehicle, and the laws in your state or province. Depending on the lender, you may be able to borrow up to half of your car's worth, with the maximum amount in most states being $10,000, and up to $15,000 in Canada. You will have to surrender the title of your vehicle ownership to the lender after loan approval. After the loan period, you'll have to pay back the principal (plus fees) all at once.
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What Are the Benefits?
One major benefit is how easy and quick the loan application process is with a vehicle title loan. Unlike personal loans from banks and other major lenders, you will not need to provide a stack of paperwork to prove your identity. Furthermore, the approval process typically takes less than an hour. When you're strapped for time and money, it might be tempting to try this turnaround. Also, most title lenders will not verify your credit history. You don't need to have a certain credit score to be approved, and your score will not decrease if you apply.
What Are the Drawbacks?
The main drawback is that interest costs might potentially reach over 500% of the loan if you don't pay it off in full by the due date. If this is the case, most of your monthly payments will go towards interest rather than reducing the debt. Making timely payments will keep the loan company from repossessing your vehicle, but this will not reduce the principal balance. This is a vicious cycle that may quickly put you further behind financially, making it more difficult to overcome. And, of course, the lender have the authority to repossess the car if you fail to make payments or fulfill other responsibilities under the loan agreement.
Are They Banned in Some Countries?
The important thing you should know is that title loans are banned in 25 countries. Title lenders may only legally operate in a small number of states or provinces because of the high costs associated with their short loan durations, large initial payments, and high annual percentage rates (APRs). To make matters worse, several of these jurisdictions have what could be called a lenient approach to regulating predatory lenders. This further increases the risks associated with borrowing money. Half of the states in the US have basically told title lenders "no thanks," so keep that in mind if you're considering getting a loan against your car's title. In Canada however, title loans are still legal across all provinces and territories. If you're Canadian however, due your due diligence and check with the Department of Consumer Affairs in your area to find how title loans operate and what restrictions, if any, exist.
What Are the Alternatives?
There are alternative financing choices to explore before you resort to a car title loan. Similar to vehicle title loans, payday loans offer very rapid payback periods and exorbitant interest rates, making them an unsuitable solution. In order to reduce the overall cost of borrowing, the following recommendations provide reduced interest rates.
- Bank loan or credit union: Think about getting a personal loan from a financial institution with whom you already have a working connection. You can get a secured or unsecured personal loan from a bank, but you can get better rates and conditions from a credit union or a smaller financial institution.
- Borrow from friends and family: If you're in a monetary bind, don't be afraid to reach out to your loved ones and ask for assistance. When lending money, those who care about you are more likely to lend to you, interest-free.
- Credit card cash advance: If you need money quickly, using a credit card may be a good alternative; but, if you can't pay off the balance in full by the due date, the interest rate will increase. For typical purchases, the average interest rate for a new credit card offer is between 16% APR and 23.23% APR, depending on credit. Nonetheless, the interest rates are normally significantly lower than those of a title loan.
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At Insurdinary, we are here to help you make the savviest financial decisions, and direct you to the types of loans that work best for you. Think about other options before settling on a title loan. If you need money quickly, look for the best APR you can find, and don't take out more than you know you can afford to pay back in the allotted time frame. In the meanwhile, you should work on setting a budget and improving your credit score. Furthermore, look into seeing a credit counselor for help with budgeting and debt management.