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One other thing that is certain is that car title loans have become very big business in America and there must be a reason why. So before you get into your car and head over to your local title loan office, it's probably a good idea to know just exactly how car title loans work.
A car title loan is a short-term loan, typically for a relatively small amount of money, secured by the borrower's vehicle title. Let's take a look at each of these components separately:
- Loan Term. A short-term loan, in this case, is one for thirty days or less initially. The important word here is "initially," which means that the borrower is expected to pay the loan back within a stated short period of time, usually 30 days. Getting it fully paid off that quickly doesn't always happen, a subject that will be discussed a little further down.
- Amount: Car title loans are usually made in relatively small amounts, from as little as $100 to as much as a few thousand, with the average amount somewhere just under $1000. In most cases, the amount of the loan will not exceed 20% of the vehicle's total value, but in some states the amount may be as much as 40% to 50% of the total value.
- Secured by Vehicle Title: When a loan is "secured" by a vehicle title, it means that the vehicle itself is put up by the borrower as collateral for
the loan. Therefore, if the loan is not paid back according to the agreed-upon terms, the borrower could lose his vehicle.
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Procedure and Terms
The procedures and terms for car title loans vary by lender and by applicable state law. That being said, you can be sure that they strongly favor the lender and are very much against the borrower. Here's why. When you visit your local car title loan office, you will hand over your car's title as collateral, and the lender will hold on to it until your loan is paid back in full. Borrowers may also be required to surrender a set of the car's keys. The loan process shouldn't take more than a few minutes as lenders rarely check the borrower's credit history . Why should they? The loan is secured entirely by the value of the borrower's vehicle and they are now holding its title.
Despite the fact that these loans are secured for well above their total amounts, the interest rates and fees are exceedingly high, often calculating out to as much as 350% annually. Sometimes higher than that. That could mean, for example, a loan of $5000 might require the borrower to come up with over $6500 (principal, interest and fees) in just a few weeks.
Additionally, loans normally cannot be paid back in installments, but must be paid off all at once, meaning that the borrower will be required to pay back the entire loan, principal, interest and fees combined after 30 days if they want to avoid additional interest and penalties.