(ThyBlackMan.com) Title loans first appeared on the market in the 1990s. They were developed as a financial product to assist individuals who needed short-term credit and who might not be in a position to get a traditional loan from a bank or other lending institution. One of the major reasons why someone might need a title loan is because of bad credit history, or perhaps not being in full-time or regular employment. For this reason, title loans have seen a surge in popularity in recent times.
What is a title loan?
A title loan is similar to a payday loan, however, there are some key differences. A payday loan is an unsecured loan, while a title loan uses your car as security for the loan. Essentially to qualify for a title loan, you’re required to transfer the title (or ownership) of your car to the lender. According to this lender, the ownership is usually transferred to the lender for a short time, for example, a term of 30 days. There are other lenders, however, that provide title loans for longer periods.
There are risks associated with taking out a title loan. However, they are also a necessary financial product for certain sections of society. It’s essential when considering the suitability of a title loan to look at both the risks and benefits.
First, we’ll take a look at some of the main risks associated with title loans.
Title loans have very high APRs
The APR or annual percentage rate applied to title loans is generally very high. Typically, the APR applied to a title loan is 300 percent.
Loans with that high of an APR means that borrowers will pay monthly interest of 25 percent. This is much higher than a traditional bank loan.
Title loan providers add fees
As well as the high rate of interest, borrowers of title loans will typically end up paying extra fees. Sometimes the fees end up being more expensive than the loan itself. A potential borrower should keep a keen eye for fees, especially those that are not so obvious at the outset. Borrowers should not be hasty in accepting the loan. First, it’s essential to carefully read the terms and conditions attached to the loan. Note the interest rate and any fees, and make sure that you are in a position to pay the loan back on time and in full.
There are risks associated with not paying the loan back on time
- First, borrowers should be aware that if you fail to repay the loan, the lender may repossess your car. According to the Consumer Financial Protection Bureau, it is quite common for borrowers to default on title loans. As many as one in five borrowers are subject to car repossession for failure to repay their title loan in full.
- Secondly, in certain cases, the lender may allow the borrower to extend their loan for a further term. For example, where your initial loan period was 30 days, the lender will allow the title loan to roll over for an additional 30 days. This may initially appear reasonable, however, it may be quite risky and detrimental for the borrower. If the loan is extended, it means that the borrower will end up paying a higher interest rate, along with potentially higher fees (e.g. for late payment of the debt). Let’s take for example a loan for the amount of $1000 with a monthly interest rate of 25 percent. If the lender allows the loan to roll over for an extra 30 days, the borrower will end up paying $500 in interest at the end of the 60 days. If there are additional fees on top of the interest, the borrower might end up paying almost double the amount of the value of the loan in a very short time.
Despite the risks associated with title loans, there are several reasons why they are a necessary financial product for many people. Let’s take a look at some of the main reasons why title loans are attractive to certain borrowers.
Title loans are available to borrowers with negative credit history
Unfortunately, many people are unable to borrow from banks and other traditional financial institutions because of their bad credit history. For example, most banks will not consider giving a loan to an applicant because of their bad credit score. Title loans act as a necessary lifeline for these types of borrowers. In most cases, to qualify for a title loan, the main requirement is that the person owns their car. Generally, a person’s bad credit score will not be taken into consideration.
Title loans are available to borrowers who are not in full time or regular employment
In addition, title loans offer a credit solution for people that might not qualify for bank loans because they do not currently have a full time or regular job. Many banks require borrowers to provide proof of employment, whereas the majority of title loan providers require potential borrowers to prove that they have some source of income to cover repayments. This source of income does not have to be from employment, however. A borrower will just need to provide proof that they receive an income, such as unemployment or disability benefit.
Title loans are available to those who need credit very quickly
Another reason why title loans are necessary for many people is because of the quick approval times. Sometimes people will need very quick access to a source of credit, for example, where the person has recently been made unemployed or needs to pay an unforeseen bill or expense. If applying to a bank for a loan, the process may take several days or even weeks. At the end of that period of waiting, it might not even be guaranteed that the loan is granted at all.
In contrast, a potential borrower may apply for a title loan online or over the phone. In many instances, title loan providers will approve the loan in a matter of minutes. Additionally, the borrower usually will receive the loan money in about 24 hours (sometimes even within 24 hours!). This is particularly necessary for people who need quick access to cash.
Conclusion
Title loans have been subject to quite a lot of controversy since first appearing in the 1990s. A lot of people view them in a negative light and associate them with predatory lending practices. For example, their high-interest rates and fees might mean that many borrowers are not in a position to repay the owed amount, and find their car is repossessed.
However, title loans are sometimes the most viable option for borrowers who do not have a good credit history. Title loans are a better option than some other short term loans, such as payday loans (which often have an APR of 1000 percent or more). If considering a title loan, borrowers should carefully weigh the risks and benefits. They should also make sure that they can repay the loan on time and be able to pay any interest that accrues, including the fees.
Staff Writer; Bobby Shaw