Car title loans use a car title as collateral in order to receive emergency cash. Title loans fall under the category of predatory lending, targeted at people with no credit or poor credit. Title loans are not legal in every state, with only 15 states openly allowing title loans and five others allowing title loans through a lending law loophole.
Title loan lenders require a clear title to receive a loan. This means that the title must not have any liens from other financial institutions. Most lenders require photo identification such as a driver’s license or identification card during the application process as well. Information required on the loan application consists of personal, financial and employment information.
Additionally, a list of contact information for references, or friends and family of the borrower, may be required. The loan agency will only call these people if the borrower does not make payments on time or if the loan goes into default.
After the application is filled out, the lender calls to verify employment and inspects the vehicle. Income and whole market retail value of the vehicle determine the maximum amount the borrower can take out. The borrower signs the contract, agreeing to the interest and payment policies prior to receiving the loan in the form of cash or check.
The average title loan falls somewhere between $500 and $2500. Interest on title loans is typically around 300 percent annually. In one month, 25 percent of the original loan amount is added to the loan, and this is typically the minimum payment. After 30 days, borrowers have the option to pay just the interest that has accrued or any amount over that. The payoff amount can be paid in full at any time. If just the interest is paid, then the loan is rolled over for another 30 days.
After the loan is issued, the borrower receives a new title with the lien via mail. This lien stays on the title until the title loan is paid in full, at which time the lender provides a lien release form. The Department of Motor Vehicles may then issue a new clear title for little to no charge.
Unfortunately, too many borrowers cannot make the minimum payments on title loans because of the high interest rates and the desperate financial situation that lead them to seek an emergency loan in the first place. If the loan is left unpaid, it will go into default. At this point, the borrower still has the option to pay the past due amount to bring the loan back to current status. If the loan remains unpaid at this point, the lender will go to small claims court to repossess the vehicle.
After this happens, the vehicle can be picked up by the loan agency at any time and payment of the loan is no longer an option. Once the vehicle is auctioned, the lending company keeps the total amount of the sale, which is often above the price of the loan.