Overview of Auto Title Loans

When you are in a financial tight spot, you start looking around for ways to get access to a little extra cash. There are many different routes you can go in order to get that money, and one of your options is to consider auto title loans. Before you decide to get an auto title loan, though, it is important to understand how they work, and know what you are getting into.

What is an Auto Title Loan?

At the most basic level, auto title loans are loans secured with a car title. Many people own their cars outright, and therefore have the title. If there are no liens on the car title, and if it is a clean car title, it can be used to get a secured loan. A secured loan is a loan with collateral. If you default on the loan, then the lender has the right to repossess the property you have used as collateral.

If you have a clean title, you can take it to a lender that specializes in auto title loans. Your car is appraised for its approximate value. In some cases, your car might go through a very official appraisal. In other cases, though, the lender simply looks at the car, or maybe enters the information about it online to get an approximate value. Once the car is appraised, the lender will tell you how much he or she is willing to let you borrow. Usually, the loan amount you receive is less than the car is worth.

Should you decide to get the loan, you will have to allow the lender to place a lien on the title. In many cases, this means that you hand the title over to the lender. The lender then has first right to your car if you default on the loan. You are securing the loan with your car, so if you don’t make your payments as agreed, the lender will repossess your car and try to sell it in order to make up the losses on your loan.
The good news is that you still get to drive your car as long as you are making payments on the loan as agreed. The lender keeps the title, and you drive away in your car. This allows you to keep your mode of transportation, while still getting the loan that you are looking for. The only thing you have to worry about is having your car repossessed if you don’t make payments.

Pros of an Auto Title Loan

There are some pros to getting a car title loan. One of the reasons that many people choose to get an auto title loan is because of the ease involved. It is fairly easy to bring in your car and its title, and walk out with the capital you are looking for.

Many lenders that issue auto title loans don’t run extensive credit checks before giving you the loan. Since the loan is secured by your car, they know that they are likely to get some money back, even if you default. As a result, those who are having a hard time getting loan approval from the bank often turn to car title loans because they can’t get approved anywhere else. Indeed, if you happen to own your car, it is usually possible to get a car title loan when other lenders won’t give you a chance.

Cons of an Auto Title Loan

As with most things in life, there are two sides of the auto title loan coin. Even though these types of loans are easy to get, even for those with poor credit, they do come with a cost. The biggest drawback is that you usually pay a high interest rate on a car title loan. In order to offset the risk of loaning you money — even with your car as collateral — title loan lenders often charge relatively high interest rates. That way, if the lender has to take a loss on a repossessed car, the interest already paid by the lender can help offset that amount.

Another downside to getting an auto title loan is that your credit score can be impacted negatively. If you already have poor credit, it might not matter as much. However, if you have fair or good credit, getting a car title loan can pull your score down a little bit. This is because one of the factors considered in the FICO credit scoring algorithm is the types of loans you have. It only accounts for a small portion of your score, but it matters nonetheless. Auto title loans, payday loans and department store credit cards are not viewed as favorably as mortgage loans, major credit cards and auto loans. As a result, you could see a small reduction in your credit score as a result of getting a car title loan.

Bottom Line

In some cases, a car title loan might be your only option. Before you get such a loan, though, it can help you look at other options. Do you have friends or family who can help you out? In most cases, paying interest to a family member or friend is likely to be less expensive than paying it to a title loan company. However, if you have no other options, it is good to know that you can use your car title to easily and quickly get a loan. You will have to pay a hefty interest charge, and you will need to make sure you can repay the loan, though. If you don’t repay the loan, you could find yourself in an even worse position as your car is taken from you.

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