How Do Title Loans Work? What You Need to Know Before Applying

More than 40% of Americans say they wouldn’t be able to come up with $400 to cover a financial emergency.

If you’re among them, then the surprise expense of a funeral, medical emergency, or even the loss of a stream of income can certainly feel like facing financial ruin. You don’t want to have to choose between putting food on the table or being able to afford a sudden expense.

With title loans, you don’t have to.

But how do title loans work, and are they your best option when you’re in need of fast cash? Keep on reading this post to find out.

What Is a Title Loan?

A title loan is an excellent alternative to a payday loan, taking on more credit card debt, or even having to ask family and friends to help you cover sudden expenses.

If you own a car, then you’re eligible to apply for a title loan.

How do title loans work, exactly?

You will sign your car over to the lender, and then receive a loan usually worth up to 25-50% of the car’s total value. Here, your car serves as collateral should you default on the loan. So, if you’re unable to make the payments on time and in the full amount, the lender will become the new legal owner of your car.

Over the life of the title loan, you’ll still be able to drive your car.

Keep in mind that you must pay on the car in full when you want to get a title loan, so it can’t be financed by another lender at the time of application.

If you share the car’s ownership with another person, you’re still eligible for a title loan. You just need the co-owner to provide a written statement saying they approve of you taking out the loan.

The Pros and Cons of Title Loans

Now that you know more about how title loans work, let’s take a closer look at the pros and cons of applying for one.

Far and away, the biggest benefit of a title loan is that they usually don’t require the lender to run a credit check on you. Especially if your current credit score is far lower than you’d like it to be, this is certainly ideal.

However, with that lack of a credit check comes high interest rates and, generally, shorter overall repayment periods than other loans carry. It’s not uncommon for you to see interest rates in the 200-300% range. This means you need to stop and consider if the loan you’re taking out is truly worth it, and perhaps explore other options.

If you know that you have an influx of cash coming in shortly, however, title loans are still a good option.

Additionally, title loans do come with application fees. Do your research before you make a final decision about a lender, and be certain that you’ve negotiated the lowest possible interest rate and initiation fees.

What’s another reason why so many people turn to title loans?

Because they provide access to cash quickly — often, within 24-48 hours after the application is complete. Title loans don’t usually come with a lengthy application process, either.

When you’re facing a financial emergency, getting cash in hand as quickly as possible is often one of your top priorities.

Finally, title loans allow you to use the money for whatever you see fit. The lender doesn’t need to approve or even know about what you plan to use the money for.

The Application Process

How does a car title loan work when it comes to the application process itself?

As we mentioned earlier in this post, the application process is relatively simple, especially when compared to other lending options.

When you’re ready to apply for a loan, you’ll need to gather only a few documents.

First, you’ll need a piece of mail or a bill to serve as proof of residence in the state in which you plan to apply for the loan. You’ll also need to show the lender proof of employment. Usually, pay stubs or even a letter from your employer will suffice here.

If you currently rely on passive income (investment accounts, etc.) then you will need to provide your lender with a few past bank statements. You must be at least 18 years of age to be approved for a car title loan.

You’ll need to, of course, present the lender with your car’s title, and provide them with proof that your car is currently insured. You will also need to give the lender a copy of your driver’s license or any other government-issued identification.

The name on your identification must match with the name on the title of the vehicle. Be aware that you cannot apply for a title loan if there are currently any liens on your vehicle.

How Do Title Loans Work? Now You Know!

Now that this post has helped you to answer the question, “How do title loans work?” it’s time to consider whether or not they’re truly the right lending option for you.

Though they come with a higher interest rate and require you to use your vehicle as collateral, title loans don’t require a credit check and allow you to have access to the funds quickly.

Are you interested in learning more about other lending options like personal loans? Curious about what you can do now to start rebuilding your credit score?

Our blog is here to help give you the financial tips and tricks you need. Keep reading through our posts to get smart about your money and financial future.

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