What are title loans?

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A title loan is a type of financing program that provides car owners with a secured loan based on and secured by the borrower’s title to an automobile or other acceptable vehicle.

Title loans offer car owners who have paid off their previous car loans (or are close to it) to access their vehicle’s value to obtain a cash loan. Standard car and automobile title loans leave the vehicle in the loan borrower’s possession, so the borrower can keep driving and using the collateral vehicle.

However, title loans typically require the borrower to give the vehicle’s title to the lender, until the loan is paid off. Should the vehicle title loan go into default, the lender will have the right and authority to repossess the collateral vehicle.

An auto or car title loan is based on the current appraised value of the vehicle being used as collateral. In general, title loan providers rely on the Kelley Blue Book to determine the current market value of the vehicle. A car loan with a higher market value can help the borrower qualify for a higher title loan amount.

In some locales, the title loan may be known as pink-slip or title pawn loans.

Eligibility requirements for automobile title loans

Depending on the title loan company, car owners can apply for a title loan in person at the title lender’s office or online. Title loan providers have differing guidelines and criteria for underwriting. As part of their underwriting and approval process, title lenders typically review the following applicant eligibility elements:

  • Income. To ensure that the loan will be repaid, title lenders typically require documentation or verification of sufficient income to repay the loan. Depending on the lender, the borrower may have to provide copies of W2s, pay stubs or bank statements.
  • Credit. Because the title loan is secured, many title loan providers do lend to applicants with less-than-perfect credit and are more flexible with their credit score requirements. Nevertheless, most title lenders still do have minimum credit requirements and credit-related restrictions.
  • Vehicle title. Auto title lenders typically require that the borrower owns the vehicle that will be used as collateral for the title loan – “free and clear.” This means that all previous car loans on that vehicle have been paid off, and the borrower has full possession of the vehicle’s title registration (or pink slip). Some title lenders will lend to borrowers who still have a balance on their previous car loan (and don’t have the title to the vehicle), but those lenders typically insist that the title loan funds be used to pay off the current loan.
  • Insurance. Many title loan providers require proof of insurance for the vehicle being used as collateral for the loan.

In addition, states have varying rules for automobile title loans – and some states do not allow title loans at all.

Determining the loan amount

The maximum loan amount that a car owner can obtain with a title loan is usually determined by the following factors:

  • Income. How much can the title loan borrower realistically afford to pay each payment period?
  • Credit. Does the borrower’s credit history, score and rating increase or decrease the maximum amount the borrower can obtain, based on the lender’s underwriting guidelines?
  • Vehicle value. What is the fair market value of vehicle being used as collateral?

The biggest factor is generally the value of the vehicle, and most title lenders use Kelley Blue Book estimates to determine fair market value, along with a visual inspection of the automobile.

But the maximum title loan amount is typically a fraction of that current market value. Unlike real estate, automobile values tend to decrease steadily as the car gets older and puts on more mileage.

Title loan application and approval process

After the borrower has completed the title loan application, most lenders are usually able to provide an approval within a few hours or days.

If the borrower accepts the loan offer, he or she will give the title to the lender, who then provides the loan funds to the borrower or deposits the loan proceeds directly into the borrower’s savings or checking account.

When the loan is repaid in full, the lender returns the vehicle’s title to the borrower and relinquishes all interest in the vehicle. Because a title loan is a secured debt, the borrower must repay the loan or face losing the vehicle altogether.

Terms for title loans can vary, but most are for at least one year, with some title loan terms stretching to as long as four years. Payments can be scheduled monthly, bi-weekly, or weekly, according to the needs of the borrower and the lender’s guidelines. Interest rates and fees will vary depending on the loan agreement, but can also vary from lender to lender.

Title loans can be a convenient source for emergency cash, but as with any loan, make sure you compare rate and fee quotes from multiple lenders. Consumers should always research all their options, conduct their due diligence and speak with a financial advisor before accepting any loan offer.

Disclaimer: NetCredit is a direct personal loan provider and does not provide financial advice, nor does it vouch for any vendor or service mentioned on our NetCredit personal finance blog or online consumer loan glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.

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