Are you thinking of taking out a loan?
If we’re being honest, who isn’t? Although personal loans were pretty popular, there’s no doubt their popularity has hit peak levels in 2020. With the COVID-19 pandemic sending millions of workers out of employment and wreaking the economy overall, so many people are in need of financial aid.
Getting a loan is an ideal way to raise the money you need to make ends meet. But then, there are several types of loans in the personal lending market.
In this article, our focus is on car title loans.
Continue reading to learn more about this type of loan before getting one.
- A Car Title Loan Is Secured
Broadly speaking, loans are subdivided into two major categories: secured loans and unsecured loans.
A secured loan requires the borrower to put forth a collateral item. This could be a house, car, or any other valuable asset. On the other hand, unsecured loans don’t need any form of collateral. The lender typically relies on your creditworthiness and income security to make a lending decision.
Car title loans fall under the secured loans category.
If you own a car, you can use it to secure a loan from your local bank, credit union, or any other lender. All you need to do is present your title to the lender and make the application.
- You Need to Own the Car Outright Or Have Equity in It
Having a car doesn’t automatically mean you’ll qualify for a car title loan.
First, the car needs to have value. If it’s a clunker, nobody is going to approve your loan application.
The car’s value should be higher than the loan amount you’re looking to borrow. For example, if you’re looking to borrow $10,000, your car’s value should range from $15,000 to $20,000 or higher. Lenders will typically give you up to 80 percent of the car’s value.
Second, you need to have a clear ownership title. This means you’re the sole owner. If you co-own the car with a lender (you’re still paying an auto loan on the car), you should have positive equity in it.
- Car Titles Loans Charge a Higher Interest
If you’re going in for a car title loan, be prepared to be slapped with higher interest rates.
According to the Federal Trade Commission, the average interest rate on a title loan is 25 percent a month. This is a 300 percent APR. In contrast, the APR on a traditional personal loan issued by a bank is 9 percent.
Evidently, car title loans don’t come cheap. This should tell you everything you need to know about them: they’re to be avoided.
However, if you’re in a pressing financial emergency, you can go for it, as they’re approved quickly and it won’t matter whether you have bad or good credit.
Car Title Loans: Approach with Caution
Cat title loans have their fair share of pros and cons, but if there’s one thing that can sum them, it’s this: expensive. Considering the high-interest rate, you might want to exhaust your options before getting one.
Need more helpful tips on personal finances? Explore our blog!