Is A Personal Loan Secured By A Car Title Considered A Title Loan?

A car title loan can lead to repossession of your car if you fail to repay the loan.

A personal loan secured by the title to your car is considered a title loan, according to CNN. To qualify for the loan, your car must be paid off and you must have a clear title---meaning no other loans are being secured by the title. You are required to hand over the title to your car when you receive the loan. The title is returned to you when you pay off the loan, but failing to pay as agreed could lead to your car being repossessed by the car title loan lender.

Purpose

Car title loans are marketed to people who need cash quickly and may not have a sufficient credit score to qualify for conventional loans from a bank or credit union. A credit score is a three-digit number ranging from 350 to 850, with a score of 620 generally considered the cutoff for good credit, according to Privacy Rights Clearinghouse, a national nonprofit consumer information company.

Predatory Lenders

People with really poor credit scores---say in the low 500s---are often forced to borrow from lenders specializing in high-risk loans. Some of these lenders, including car title loan lenders, are considered "predatory lenders," according to CNN. Car title lenders typically do not require a credit check and only minimal income verification is needed, such as a recent pay stub.

Exorbitant Interest Rates

In return for the easy qualifications car title loan lenders charge staggering interest rates that can exceed 250 percent, according to CNN. However, many states have passed strict laws limiting the interest rates car title lenders can charge. The limits vary by the state, but the loans still remain among the most expensive available, far outstripping interest rates offered on loans by banks and credit unions.

Alternatives

Someone seeking a car title loan should apply at a bank or credit union first. There is a chance that the loan could be approved even if the applicant has poor credit. The paid-off car serves as collateral for the loan, removing some of the risk for the bank or credit union. Someone with a paid-off car worth, say, $2,500, may qualify for say, a $1,000 secured loan at a bank or credit union, with affordable monthly and a reasonable interest rate.

References

• CNN: Car Title Loans Are A Bad Idea
• Privacy Rights Clearinghouse: Credit Scores

Resources

• CNN: Car Title Loans Are A Bad Idea