Online title loans are an easy and fast way to get cash, but the risks involved make these loans more trouble than they are worth. Debt grows quickly and defaulting on your loan most likely means losing your only mode of transit.
Title loans, sometimes referred to as car title loans, both online and from traditional stores, have long been the focus of regulatory action due to the cycle of debt these loans can cause. We strongly recommend using these loans only as a last resort.
Online car title loans are loans taken out using your motor vehicle as collateral. These loans are usually expected to be repaid within a month, with many lenders offering to extend this period by renewing or “rolling over” the loan. The renewals often come with high fees or interest rates adding on more debt to the original agreement.
Along with the risks to your credit, car title loans can put your access to your workplace, school, or home at risk (due to using your car as collateral). Due to the risky nature of these loans, title loans are highly regulated or outright banned in nineteen states, not unlike payday loans and short-term loans.
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Title loans are often marketed to those with poor or little credit history, similar to bad credit loans. Title lenders tend not to check credit or accept very poor credit. The biggest factor when applying for a title loan, is the market value of your vehicle.
Lenders are only able to accept vehicles that are fully paid-off and are titled in your name. The loan amount you’re approved for and that you borrow is based on the market value of your car. Depending on the make, mileage and year of your vehicle, lenders usually value your car far below the market rate, extending maximum loan amounts of a few hundred to a couple thousand dollars.
Many lenders will continue to “roll-over” your loan amount. While this will give your more time to repay, your lender can claim your vehicle at any time after the term of your loan. This process can lead to a cycle of charges with roll-over fees deepening your debt. If you can, at least make a partial payment on your loan.
If you’re unable to repay your loan and the lender declines to extend your payment time, your vehicle (collateral) will be repossessed. Most lending companies will hire a third-party repossession agency to find and tow your vehicle. Repossession agents can take your car at any hour of the day without notice or warning. You may wake-up one morning or clock out of work only to find your vehicle gone.
In contrast, if you default on a payday loan, short-term loan, or a Possible loan, no collateral will be seized. These are unsecured loans so only your credit profile may be negatively impacted.
Hunt down information about your vehicle
Whether you are applying for a title loan online or in a brick and mortar store, you will need to know the make, model, year, and mileage of your car. Depending on the lender, you may need proof that your vehicle is lien-free and fully paid-off. In other words, you must have a lien-free title and you should bring your certificate of title.
As with any other loan application, you will need to have your personal (such as your driver’s license) and banking information ready. When applying online, always make sure you are applying to a known and verified service.
Apply though your lender
Each lender will have their own process for applying. Some allow you to apply completely online while others will require an application over the phone after you have submitted your information through their website. Some type of online form or online request is common.
Receive your cash funds
The only real advantage of title loans is the speed at which you can receive your loan. Online title lenders will often send your funds directly to your bank checking account or debit card as a "same day loan", while brick and mortar stores are quick to pay in cash during your first visit.
Fast cash without credit
Like many other payday and short-term loans, title loans are intended to be used for small financial gaps, unexpected expenses, or cash emergencies. With this is mind, lenders try to make the application process as quick and easy as possible and require no credit check. Applications are usually processed the same day, with your funds arriving within 1-2 days.
You can continue using your car (sort-of)
Lenders are only really interested in selling your car if your loan remains unpaid, so you will be able to use your car even while your loan is open. Be careful though. While lenders may not be quick to repossess your car, the threat of repossession can cause immense pressure to repay or renew with added fees.
You may lose more than your car
Borrowing funds against your car can be much riskier than it seems. A 2016 report by the Consumer Financial Protection Bureau shows one in five borrowers have their vehicles repossessed by their title lender. Unless you live in a city with reliable mass-transit, you most likely rely on your vehicle to commute to work, shop for groceries, and for general transit. If losing your vehicle means losing your ability to earn income, buy food, or seek medical treatment, defaulting on a title loan can lead to catastrophic financial trouble.
While repaying your loan, you may still be able to drive your car, but only at your lender’s discretion. Some brick and mortar-lenders will install tracking systems or ignition impairment devices to give your lender easy access to your vehicle should you default on your loan. Some lenders use these ignition devices as a “reminder system”, preventing you from starting your car until you’ve made a payment. Under these systems, you’re paying for access to your own vehicle. You will need to call your lender at their telephone number just to use your vehicle.
It’s easy to think of a title loan as borrowing against yourself. Your car has “value” and your loan simply gives you access to this value in the form of cash. While this description is accurate, it’s not quite correct.
In the current market for title loans, lenders will only extend borrowers somewhere between 25% to 40% of what your vehicle is worth. If you’re really lucky, you may find a lender willing to extend up to 50% of your car’s value.
What makes this a bad deal? Title lenders value your car based on its market value. If your car is worth $12,000 used, you may only be lent $5,000. Not only are you responsible for repaying this $5,000 back with fees, the remaining value of your car is forfeit should you default on your loan.
Online title loan lenders have become much more common as many payday, cash advance and short-term loan lenders have migrated some services out of brick and mortar stores. As with any business online, there are inherent risks.
It can be difficult to know exactly who you borrow money from. Terms, agreements, and fees can be hidden on pages that are difficult to find. Your personal and financial information can be compromised, either by your loan lender or simply a lack of security measures in their system.
Rolling over your loan can trigger an avalanche
While title loans may only seem dangerous to those who miss payments, A recent report by the CFPB shows this cycle is more of the “rule” than the exception when it comes to Title loans. According to the CFPB Only 12% of lenders pay off their loans without “renewing” their loan.
Title loans are marketed as single payment loans, however, 80% of title loans are renewed by borrowers on their due date. These fees quickly add up turning what was originally a one-time emergency loan into long term and unaffordable loan. One third of lenders renew their loans more than 7 times! These customers make up over two thirds of the entire title loan customer base, trapped and paying ever-growing fees.
Regulations around these loans
Payday and title loans have been the target of recent regulation in many states. Title loans are outright banned in Colorado, Connecticut and Hawaii, among others, and the Arizona State legislature is moving forward with an initiative to ban title lending in 2020.
Other states have sought to more strongly regulate these title loans through interest caps and fee limits. In certain states, regulators require title lends to pay you, the borrower the difference of your loan and the sale price of your car if the loan is defaulted on.
Reach out to your bank, local credit union, or other lending services. Personal loans are more difficult to qualify for than payday or title loans and may have a longer application, but the interest rate and fees are extremely low when compared to other short term option. Usually, you’ll repay the loan in monthly payments.
Credit card cash advances
Cash advances through your credit card are an expensive way to have cash in hand, but are a good option before turning to Title loans. Most card vendors will charge a flat rate or percentage based on the cash amount you are withdrawing.
Installment loans can be a solid option for cash if your credit is lacking. These loans are highly structured, breaking your payments down into easier to manage installments. Since installment loan amounts are fixed, you avoid the risk of falling into a cycle of debt. A Possible loan is a type of installment loan where you can get up to $500 in minutes and build credit history – much better at improving long-term financial health.
Payday alternative loans
Many community banks, credit unions, and other financial institutions offer short-term lending options at extremely low rates. Compared to the often high cost of traditional payday loans, this alternative option can provide a secure and affordable way to cover an emergency. The only difficulty is in finding these loans. Payday Alternative loans (PAL’s) are comparatively new to the market and are difficult to find outside of a few major credit unions. You’ll likely need some proof of income to qualify.
Reach out to your employer. Most employers are willing and able to provide a paycheck advance if you fill out a request form. Paycheck advances can either come from earned wages or as an installment loan. An advance on earned wages is generally interest free – however since this amount is based on the work you’ve already done through a pay period, the amount of the cash advance may be small.
Your employer may also offer paycheck advances in the form of an installment plan. These advances are usually based on future work, with your payments being automatically deducted from your paycheck. While advances are less costly than a traditional payday loan, it’s important to balance your installment payments with other paycheck deductions.
Friends, family, and community
An often overlooked option for cash funding is the community around us. Lending from friends and family can be a great option, however it’s important to treat the loan as serious as you would from any other lender or financial institution. Lending can be emotional, “defaulting” on your loan with a friend may not damage your credit score but it will impact your relationship.
When lending from someone you know, it’s best to formalize the process. Create a written loan agreement detailing when and how you will make your payments, what happens if you’re not able to make a payment, interest cost, and other important details. By agreeing to a formal loan agreement, the loan should feel fair to the lender and the borrower.
Some community and faith-based organizations also offer low-interest or even no-interest lending options. Make sure to research city-run programs and lending options from local non-profits. If you are a member of a religious community, you may be able to receive help from those around you.