What Is A Car Title Loan

What Is A Car Title Loan

A car title loan, sometimes just referred to as title loan, is a secured loan where the borrower provides their car as security (collateral) for the lender. If the borrower defaults on the loan, the lender may take possession of the vehicle.

Since the title loan poses a lower risk than an unsecured loan the borrower might obtain a more favorable interest rate than he could get on an unsecured loan.

Generally, the maximum loan amount will be around 50% of the car’s resale value. The loans are typically short-term, and tend to carry a comparatively high interest rates. They are commonly used mostly by subprime borrowers with few alternatives.

In addition to verifying the borrower’s collateral, many lenders verify that the borrower is employed or has some other source of regular income.

The lenders do not generally consider the borrower’s credit score. In this sense, title loans are broadly similar to the (typically unsecured) payday loans, and sometimes offered by the same non-bank lenders.

As you can see, these types of loans are not typically used to finance the purchase of a car. They’re more comparable to raising some fast cash by pawning a valuable asset at the pawn shop.

While many providers of the auto title loan provide full disclosure to borrowers before completing the loan application, others do little more than the minimum required by local law.

The end result is that borrowers who are in dire need of quick cash may fail to read the terms and conditions thoroughly and thus commit themselves to a car title loan arrangement that they may or may not be able to pay back in a timely manner.

In any case, choosing to apply for a car title loan should be something that takes place only after all other avenues of securing short term financial assistance have been exhausted, and only if the borrower is confident of being able to pay off the loan within terms.