Emergencies happen, and those unexpected moments can quickly thrust a family or an individual into a financial tailspin. According to CareerBuilder, 78 percent of Americans are living paycheck to paycheck. Unfortunately, living from paycheck-to-paycheck is becoming more prevalent. In fact, a savings account and the safety net it provides is a luxury that about 25 percent of Americans do not have.
So when unforeseen expenses hit, how can a family afford what they need? For individuals with bad credit—or even good credit—the equity in their automobile may hold the key to quick and fast cash to help cover those financial hits. Taking out a loan against the equity of an automobile is called a title loan, and it allows consumers to borrow anywhere from a few thousand to tens of thousands of dollars at once. So what do you need to get a car title loan and how does the process work?
Factors That Affect Auto Equity: Outstanding Loan Balances, Vehicle Age & Overall Condition
There are a few provisions on who can take out a title loan. If you recently purchased your automobile or if you still have a high outstanding balance on your car loan, taking out a title loan might not be a feasible solution. Like a Home Equity Line of Credit (or HELOC), a title loan requires a certain amount of equity to secure a loan. The difference between what you owe and what your car is worth denotes the equity. This means that if you sold your car, you could pay off your loan and still have money left over. Equity makes a car—or any investment–an asset versus a liability.
If you’ve paid down a significant amount on that car loan, you may be able to tap into the value of your car. Additionally, if you’ve paid off your car, then you have an even greater amount of equity that’s accessible. Keep in mind, though, that the age and condition of your car also can affect its value. Older car models or cars in poor condition will have a lower valuation according to Kelley Blue Book, which is the standard resource for determining a car’s value. Even though a car may cost-$30,000 on the date of purchase the value will decrease with time, wear and tear, and usage.
- Kelley Blue Book is the standard industry resource for determining a car’s value
- Age and condition greatly impact equity value
- Outstanding loan values also lower the equity of the vehicle
Getting Approved: What Is Needed for a Car Title Loan?
If you’re fairly confident that your car holds equity, then it’s time to begin the application process for the title loan. What is needed for a car title loan, and are there specific documents that you must have in your possession before you can be approved?
You’ll need to provide your Loan Officer with all the current loan paperwork associated with your vehicle. This means that you should bring documentation from your lender about your outstanding balance as well as any other pertinent loan information. This helps determine the value of your car and how much you can borrow.
Applying for a title loan also requires a credit check that will reveal your FICO score. Your past credit history, any collections efforts pursued against you and positive payment reports all will be taken into account to determine your credit risk. However, in many cases even individuals with poor or bad credit can still secure a title loan. Your credit score will determine and affect your risk and your loan rate—the annual percentage rate—that directly impacts your monthly payments. Those with higher credit scores may receive lower interest rates.
The Three Major Factors That Affect Loan Terms & Approval
- Current balance on your existing car loan
- Current value of your automobile
- Your FICO score
Before You Sign
All applicants should understand that title loans are meant to be a short-term solution for quick cash. These loans are not intended to be used as a long-term financial solution, and a title loan also is not intended to be used over and over again for recurring cash flow.
The goal for title loan terms is to pay them off as soon as possible. Typically, title loans carry a much higher APR than traditional loans. The sooner the loan is paid off in full, the less financial burden the payments will carry.
So what do you need to know before you sign the loan paperwork? Read through all the terms and conditions of the loan. This means reviewing the APR and how it affects your monthly payments. Prepare to make on-time payments and plan out how to get a car loan with bad credit to ensure that you don’t fall behind on loan payments. Like all loans, title loans are expected to be paid in a timely manner each month. Late payments can and will result in higher fees that dramatically affect the loan balance.
Read Before You Sign
- Review Loan Terms & Conditions
- Annual Percentage Rate (APR)
- Monthly payment obligations
Annual Percentage Rate, Monthly Rates & Fees
With title loans, consumers may notice a monthly rate and the annual rate. So what’s the difference and does it affect the monthly payments? The annual percentage rate is the rate you pay over the course of the year, and this rate may vary greatly between loans and individual circumstances. For title loans, the APR is divided into a monthly rate and this is what many consumers see on their monthly statements. A 48 percent APR would mean that the monthly rate is four percent.
Your loan will also include an ‘origination fee,’ which varies depending on what state you’re located in, and what company is providing the loan. This fee is standard for many title loans but you should check your local laws for the maximum you may have to pay. You also may be charged an extra fee if a payment is received late, and this is a standard practice for almost all loan types.
Breaking Down the Monthly Statement
- Monthly percentage rates are the APR divided by 12
- Origination Fee charges also may be reflected in your payment balance
- Late Fees also affect the monthly payment…so pay on time!
How Much Should You Borrow?
Title loans can maximize the full amount of equity in your car or you may decide to only access a portion of the equity. Just because you have $10,000 worth of equity doesn’t mean you have to access that amount. Make sure you borrow enough to pay for what you need to cover, but do not overextend yourself by borrowing more than you really need. Make sure that you can afford the monthly payments when they are due. Tapping into more money than you need may result in higher monthly payments and overextending your finances.
- Borrow only what you need
- Avoid maxing out your car’s equity
- Allocate the money responsibly (wants vs. needs). The Pew Charitable Trusts noted that “just over half of borrowers use title loans to cover regular expenses, such as rent or utilities.”
- According to Pew, 30 days is the most common title loan term.
Late Payments, Defaulting & Your Car
Failure to pay a title loan can mean defaulting on the loan and that holds very different consequences than it would for traditional loans. If you fail to make consistent payments on your title loan, the lender can repossess your vehicle. Remember, a title loan is backed and underwritten by your car’s equity and the lender holds a lien against your vehicle. Failing to meet your obligation on the loan means that the lender can take your car as collateral to pay back the loan.
While individuals should understand the impact of defaulting, if payments are made on time and consistently, then the ownership of the car is not in question. No lender wants to repossess a vehicle just as no bank wants to foreclose on a home; this is typically the last option, however, when other efforts of remediation have failed or are not possible.
Default Facts & Paying Back the Loan
- According to Pew Research, “between 6 and 11 percent of title loan customers have a car repossessed annually.”
- Pew also notes that about 47 percent of borrowers use “cash infusions” (like a tax refund) to repay their loan.
- An estimated 15 to 25 percent of repossessed cars are returned when borrowers can pay what they owe (the loan balance plus any accrued fees).
Title Loans for Recreational Vehicles (RV) and Motorcycles
For consumers who don’t want to utilize the equity in their family’s car but own other vehicles, title loans also can be backed by the equity in a motorcycle or a recreational vehicle (RV). Loan amounts are determined by the value of your vehicle, just like car title loans.
Refinancing a Title Loan
Not all lenders offer the same terms, and if an outstanding title loan has become difficult to handle for whatever reason, then refinancing the loan might be an option. Refinancing a title loan requires the same steps as getting a new title loan; your credit will be reviewed to determine if a lower interest rate is an option. Refinancing may help free up extra cash each month, and, for many struggling families, even a small reduction on those monthly payments can make a huge difference. If your outstanding title loan has become financially unmanageable, it never hurts to check out your refinancing options.
Title loans are a short-term solution for financial obligations that are unplanned but necessary. Many families live paycheck-to-paycheck, and when an emergency expense hits, the financial repercussions may be devastating. Title loans allow consumers to tap into the equity of a car, RV, or motorcycle to cover those unexpected bills, but these loans are not meant to be recurring solutions to monthly income shortages. These loans are backed by your automobile’s equity. Used responsibly, these loans allow quick and easy access to money for emergencies and may even improve your credit score when you pay on time. As with any loan, be smart about how much you borrow and always pay on time. Before you sign on the dotted line, read all the terms including the loan’s annual percentage rate and never hesitate to ask your lender any questions if you’re confused about your obligations.