Information on Car Title Loans

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By Shauna Zamarripa
eHow Contributing Writer

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Car title loans offer consumers short-term loan solutions to assist with temporary financial needs, and are specifically targeted toward individuals who have no credit or bad credit. These loans are often used for emergency funds when a consumer is short on cash. The loans are secured by a consumer's clear vehicle title (in other words when a consumer owns his car free and clear of any payments). In many cases, the consumer can retain her vehicle for the duration of the loan; but this type of short-term loan doesn't come without risks to the consumer.

Terms

The terms of a car title loan will range from two weeks to one month in length. There is no credit check involved in a car title loan, as the title to the vehicle is secured as collateral in the event that the consumer defaults on the loan. This gives the lender the option to repossess and sell the vehicle if the consumer doesn't pay back the loan as agreed. Amounts granted are based on the vehicle's value and will range from $500 to $10,000 in most cases. This is based on the market value (what consumers are willing to pay) for the vehicle, as determined by Kelly Blue Book values or the National Association of Auto Dealer valuations.

Interest Rates

The interest rates associated with car title loans in most cases are extremely high. For a 30-day loan term. On a $500 title loan this would be an added fee of $125 in interest alone. Essentially, this would be equivalent to a creditor charging a consumer a 300 percent APR on a credit card or store card. Consumers agreeing to this high of a rate of interest could wind up paying back a car title loan several times over.

Additional Fees

Some car title loan firms charge consumers additional fees on top of interest fees. These can include: processing fees, roadside assistance fees, document fees, lien fees, late fees or origination fees. If a consumer isn't careful, he could wind up paying back two times the amount he received as a loan at the end of the loan term, or more in some cases.

Extensions and Rollovers

In some cases, consumers are given the option to extend their loan or roll over interest fees to elongate the payment term. During this time, interest will continue to accrue at a very high rate in addition to other, separate fees being charged for rolling over loans or offering extensions on a current loan term.

Risks

The largest risk involved in a car title loan transaction is the risk of losing a vehicle in the event that the borrower is unable to pay the title loan back. Since the loan company placed a lien on the property it can repossess it and sell it at auction. In some states, it is required that the lender pay back any proceeds over and above the amount of the sale to the borrower. However, it is common for a consumer to walk away penniless and without a car once a repossession has occurred on a title loan.

Warning

If a car title loan is the only solution available to a consumer, it is wise to use it for the purpose that it is meant for, which is a short-term loan. This will keep loan fees at a minimum. When taking out a title loan, pay it off in full at the end of the term and resist the temptation to reuse the service.

Alternative

As opposed to taking out a car title loan where the likelihood is paying high fees and interest rates, consumers should consider obtaining a secured credit card if her credit is less than perfect. These credit cards will require a secured deposit as collateral to open the card, but will offer consumers a longer payment term and a significantly lesser rate of interest.