If you are looking for a way to get your hands on fast cash, but do not have the credit score that you need to take out a traditional personal unsecured loan, you may be wondering what the risks and rewards of pursuing something like a car title loan are.
Car title loans are secured personal loans that are tied to the value of your vehicle. That means that you can get fast financing without a credit score check to cover overdue bills, credit card debts, emergency medical costs, and more.
That being said, car title loans do come with some real risks that you should keep in mind as you begin your application process.
So what are the major risks and rewards of car title loans? Read more to find out.
Reward: They’re fast and easy
Personal loans can be typically quite hard for people to secure, it is no longer the time where you can walk into a bank and walk out with several thousand dollars with few questions asked. Now, financial institutions such as banks and credit unions make sure that they are lending to individuals who will be able to pay back their personal loan on time.
That means lending institutions doing deep dives into your financial history and borrowing history, which typically means initiating a hard pull on your credit score.
If you have a lot of credit card or student loan debt, has filed for bankruptcy, or have something like an eviction in your past, chances are good your credit score is quite low. This can leave you on the outside looking in when it comes to personal loans.
Luckily, car title loans are very different. Because they are tied to the value of your car, you do not have to have a strong credit score or any credit history to qualify. All you need is a vehicle that you own in full and you have a lien-free title for. That’s it!
Risk: It can be hard to get out of title loans
The goal of all loans is to take one out, use the money for what you need, and pay them off over time. Because title loans typically have short repayment terms and high-interest rates, it can be hard to pay them off.
Think about it, if you take out a title loan worth $1,000 and have a month to make up that money, plus you have a 25 percent interest rate that you have to worry about (it’s high but it’s the national average for interest rates on title loans). That means that you are going to have to make $1,250 at least to pay off your loan in full by the end of your payment term. That might be easy if you have a great-paying job, but if you are unemployed or underemployed you might be scrambling for cash and still come up short.
That means that you will likely have to rollover your loan to another repayment term, which definitely means more interest charges and possibly means late fees and more. For that reason, it can be quite hard to pay off a title loan in full which can, unfortunately, lead to a nasty cycle of debt.
Reward: You don’t have to trade in your car
Unlike car pawn loans, car title loans do not require you to part ways with your vehicle during the life of your loan. In fact, the only thing that you need to trade in when you take out your car title loan is the actual title of your car.
The title of your dictates ownership. For example, if you took out a car loan on your vehicle, the bank or online lender that funded that loan has a lien on your title, meaning they have a financial stake in the car just like you do. The same can be said for when you lease a car.
Why this is a positive for you is because it is completely safe and legal to drive your car even if someone else or a different company (such as a title lender) has put a lien on it.
That means that you can take out a title loan, have the money you need to cover whatever financial emergency you are facing, and still drive your car to-and-from work as you typically do. It’s a total win-win and one of the things that make title loans so attractive to those that need fast cash.
Risk: You can actually lose your care completely as a result
This is obviously the ultimate downside of any secure loan. Just like not paying your mortgage and going into default, if you default on a title loan, the lender that you borrowed from will have the option to repossess your car to make up for the financial loss they are facing as a result of lending you the money that you need.
Even worse, even if your car is repossessed, if they do not get enough money in return to pay off your loan in full, you could still be on the hook financially until you pay it off in full yourself.
Luckily, there is relief when it comes to title loans. You can easily refinance or consolidate your title loan with another company. That means that a different title lender will pay off your current loan and you will then owe them money. While it might feel like digging yourself into a deeper hole, many title loan refinancers offer loans with much more flexible repayment terms and interest rates. That means that while you will certainly be paying more money over time (because the longer the repayment term the more you will owe in interest rates) you will hopefully get the precious time you need to come up with the money you owe.
On the whole, title loans are a calculated risk. If you need the money and you need it now, they can be a fantastic and flexible resource. If you are simply looking for some extra cash, but do not need it desperately, you may want to consider these risks and rewards before signing up for a car title loan.