DEFINITION of Car Title Loan
A car title loan (also known as an "auto title loan" or simply "title loan") is a short-term loan in which the borrower's car title is used as collateral. The borrower must be the lien holder (i.e. own the car outright). Loans are usually for less than 30 days. If the loan is not repaid, the lender can take ownership of the car and sell it to recoup the loan amount.
BREAKING DOWN Car Title Loan
Car title loan lenders often target those with low incomes and bad credit and charge high interest rates; those with access to credit cards or bank loans would not be the target customers. Car title or auto title lenders are sometimes called "predatory lenders" because of the way in which they prey on those who need cash in emergency situations.
Although lenders must state the interest rate at the time the loan is made, if it is a short-term loan, the borrower may not realize that the quoted rate is not annualized. For example, if a one-month loan rate is advertised at 25%, that annualized rate is actually 300%.
Practices Associated With Car Title Loans That Warrant Close Attention
Some lenders may offer car title loans even if there is no clear title. The loans may typically be offered for a funding amount somewhere between 25% and 50% percent of the car’s value. In many cases, such loans may range from $100 to $5,500. However, there can be instances where such loans are in excess of $10,000.
The loan application might be completed online or at a storefront. During the application process, the borrower may need to present the title, proof of insurance, photo identification, and the car. The lender may require a duplicate set of car keys to be made when the application is filed. They might also install a GPS tracker to know the location of the car and a device that would disable the ignition of the car if it becomes necessary to repossess the vehicle. The lender will take possession of the title when the funds are given to the borrower and will be held until the loan is repaid.
Along with the principal balance of the loan, lenders could require additional fees to be paid by the borrower such as a roadside service plan, which further increases the amount that will be due.
If the borrower cannot pay back the loan within the term, the lender might offer to rollover the debt into a new loan that usually will include new fees, charges, and a higher interest rate. This process could continue, with the borrower increasing their debt to the point it is impossible for them to repay the loan. At that point, the lender may decide to repossess the vehicle.