Title loans are a form of credit secured by the borrower’s vehicle, meaning that your vehicle is declared as collateral. Usually, this is a technicality and you will still have physical control of your vehicle, but if you fail to pay your loan back, then it will be seized.
1 in 6 title loan borrowers have their vehicle seized. If you want to avoid being one of them, there are some steps you can follow. This guide aims to explain title loans, how the work, and what they are.
Key Points
- A title loan declares your vehicle as collateral against the loan, while a payday loan is unsecured.
- The size of your loan depends upon how much your vehicle is worth. The more expensive your collateral, the higher a loan you will be entitled to.
- Title loans are only authorized in 17 US states, such as Texas, Georgia and Illinois.
- 1 in 6 title loan users lose their vehicles.
Where Are Title Loans Legal?
17 states in the US authorize title loans, while they are illegal in the other 33 states. They are legal in Georgia, Idaho, Illinois, Alabama, Arizona, Delaware, Mississippi, Missouri, Nevada, South Dakota, Tennessee, Texas, Utah, Virginia, Wisconsin, New Hampshire and New Mexico.
California prohibits title loans, while only 17 states allow them.
What Is A Title Loan?
Title loans are a form of short-term, secured credit which is secured by the borrower’s vehicle. 2 million Americans take out title loans each year, while the US boasts 7,700 car title loan providers.
Throughout the duration of your loan contract, your creditor will usually hold the title of your vehicle. Even though you can drive your vehicle, in most cases, it will be in your lender’s name until you repay your debt, when ownership is returned to you. The lender’s ownership acts as a guarantee that the loan will be repaid. Either, you will repay it as agreed or, failing that, they seize your vehicle, and usually sell it.
Can I Take Out A Title Loan With Bad Credit?
Yes, in many cases you can still get a title loan if you have bad credit, but you must own a vehicle to do so. Given that your vehicle acts as assurance of repayment to your lender, the relevance of your credit score falls, as they have a guaranteed means of repayment.
Because of this, plenty of title lenders will not carry out credit checks – it isn’t worth their time. Even though a credit check may not be carried out, you must still have a repayment plan in mind. Remember, your vehicle is on the line and it is not uncommon for borrowers to lose their vehicles as a consequence of title loans. Your creditor can seize your vehicle if you fail to pay them back; technically it is theirs under the terms of the loan.
How Much Credit Can I Borrow With A Title Loan?
This rests on the value of your car or other vehicle. Usually, borrowers can secure a loan of between 25% and 50% of their vehicle’s worth.
Let’s say that you have an RV worth $10,000. Most likely, you will be able to borrow up to $5,000. Title loans are offered from as little as $100 to over $10,000.
What Are Some Alternatives to Title Loans?
Payday Loans
Payday loans are short-term, high-interest loans that can provide you with your funds within one day of applying.
Unlike the title loans, payday loans are unsecured, which means you do not need to declare any collateral. Because of this, your vehicle cannot be seized – nor can your home.
These loans are expensive with an average APR of 400%. As such, you should only take out a payday loan if you truly need one. These are designed for unexpected circumstances, such as urgent medical bills and home repairs.
Credit Union Loan
Another option is to approach a credit union for a loan – but you have to become a member. This is therefore a slower process, and you can often only secure a small loan. This is more suited to you if you’re not pressed for time or large lump sums of cash.
Loved One
You could approach a loved one for support, but this could result in relationship damage. 36% of Americans who have lent cash to a loved one have reported such consequences.
By taking out a title loan, you are putting your ownership over your vehicle on the line.
Is A Title Loan Or A Payday Loan Better For Me?
A title loan could work well for someone who has a car to use as security and wants to borrow a larger amount than a payday loan would necessarily allow (borrowers able to get loans of $10,000 or more depending on the value of their vehicle). If this is you, you should be certain that you will pay it back. Otherwise, you may have to say goodbye to your vehicle – and say goodbye to the strength of your current credit score.
When looking to find the best loan for you, it’s good to explore a variety of different options, helping you make a more informed decision on how and where to borrow.
