What are car title loans?
A car title loan, sometimes also referred to as a pink slip loan or title pawn, is a type of short-term secured personal loan in which a borrower’s automobile title is used as collateral for the borrowed funds. The vehicle’s title indicates the current ownership of the automobile, and title records are maintained by the state in which a vehicle is registered.
When borrowing funds using one’s car title, the borrower must be the actual title holder on the vehicle. This means that he or she owns the automobile outright and there are no other liens that are being held against the particular vehicle. In other words, any and all previous car loans for that vehicle must be fully paid off before the car owner can receive a title loan.
Elements of a car title loan
- For currently owned cars. As mentioned above, automobile title loans require a free and clear title to a car.
- Installment loans. Like most car loans, typical car title financing are usually installment debts with monthly or bi-monthly payments.
- Higher rates. Depending on the title loan provider’s guidelines, the vehicle’s blue book value and the borrower’s qualifications, the automotive title loan may charge higher interest rates than standard car loans.
- Secured by the car’s title. Both car title loans and standard auto loans require the car owner to pledge the car’s title to the lender, until the loan is repaid. The borrower keeps possession and use of the vehicle, as long as payments are made as agreed.
- Subject to repossession. If the borrower defaults on either an auto title loan or a standard car loan, the lender typically has the authority to repossess the car. Auto loans are types of secured loans, which mean the vehicle is the security for the loan. The lender can then sell the automobile to satisfy the current loan obligation. Any leftover funds are then turned over to the borrower.
Car title loan requirements
Car title loan borrowers must also pass the lender’s underwriting requirements, just like standard automobile loan borrowers. However, many title loan providers offer more flexible underwriting terms than standard car loans, such as accepting borrowers with less-than-perfect or no credit history.
The borrower’s credit history and available income will help determine the maximum car title loan amount that the borrower can borrow. But the most important factor in determining maximum title loan amounts is the market value of the automobile.
The title lender will evaluate the value of the borrower’s vehicle based on retail prices, and then offer the applicant a loan dependent on what they believe the car is worth. Most automobile title lenders rely on services such as Kelley Blue Book to determine the vehicle’s current resale value. In general, the actual title loan amount offered is significantly less than the Blue Book value, as the lender needs to account for the risk of potential defaults and the fact that the vehicle’s value will continue to decrease over the life of the loan.
The loan terms for car title financing will vary according to the lender’s guidelines, loan program and state regulations. Auto title loan terms can be as short as one month or as long as four years, or more.
Although some title lenders require a physical inspection of the car before the loan can be finalized, some car title lenders do offer potential borrowers the option of applying for a title loan online, allowing consumers to apply for a loan from the comfort, convenience and security of their own homes.
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