A car title loan is a line of credit issued to a personal loan client under the condition that they secure the loan with their automobile title. Unlike traditional loans, a title loan is not issued by a financial institution that reports a client’s borrowing and payment dynamics to credit bureaus. In turn, auto loans do not impact the borrowers’ credit rating history.
There are numerous important factors to consider before you acquire a car title loan. This includes the loan value relative to the equity held in the loan security, the interest rates charged, the expense incurred by the borrowing and repayment process, credit counseling, loan proceeds, the loan repayment period, and the respective installment payments.
How to find out the title loan value of a car
The amount issued for an auto title loan by many lenders depends on the equity held in the automobile used to secure it. Therefore, the initial step in applying for the above loan on your side as the client should begin by establishing how much equity is held in the vehicle you intend to use to secure the loan.
The next step is considering the different agencies that offer car title loans in your zip code. Normally, a title loan’s value issued is a percentage of the equity held in the vehicle used to secure the loan. Most of the entities offering the above loans issue loans within a range of 25% to 50% of the value of your car; making the loan-to-value ratio of a title loan to car equity 1:4, 1:3, or 1:2. Therefore, you should review the offers presented by title loan agencies within your area to determine which lenders have the best deal for you.
After determining the best value offered for you among title loan agencies within your zip code, you should proceed to calculate what the offer translates to in terms of the quantitative size of the loan. The calculation determines how much cash one will get for a title as the loan amount. The loan-to-value ratio can be obtained by multiplying the title loan value percentage by the equity value of your loan security.
Suppose a lender offers a car title loan of 41% of the value of your car, and the current value of your vehicle is $6,000, then the loan amount to expect to attain from the agencies can be attained as expressed in the equation below.
Loan Amount = Percentage of Equity offered as loan * Value of Equity held in Car
Loan Amount = 0.41*6000
Loan Amount = $2,460
State restrictions on title loan amounts
Financial organizations in the United States are regulated by both the federal government and the respective state governments. At the national level, car title loans are legal except in cases where specific states ban them. As such, the legality of title loans in the US is conditional depending on the individual state’s constitutions.
The U.S. federal law has no restrictions on the amount attained by a borrower through a title loan. However, various US states have additional regulations that either completely ban title loans, create legal loopholes for title loans, or control the practices associated with lending and borrowing title loans.
For instance, the U.S. Bureau of Consumer Financial Protection announced an ongoing deliberation to introduce new laws and regulations for borrowing and lending practices in the car title loan arena. The new policies, if passed, will mandate title lenders to only lend to you if you demonstrate your ability to meet the interest and administrative fees expenses associated with title loans.
How much does a title loan cost?
Title loans are some of the most expensive ways to borrow money. Other common borrowing alternatives used include credit card cash advance, payday loans, and personal loans. There are numerous underlying factors that can account for the high cost associated with auto title loans. The first factor is the high-interest rate that is usually charged. Typically, auto loans have a higher interest rate than conventional financial institutions such as banks.
Besides, the risk of losing your car used to secure the loan is another critical aspect of the expense associated with title loan lenders. It is not uncommon for personal loan borrowers to default payments. However, for a title loan, your inability to meet the pre-agreed payment installments could lead to the repossession and sale of your vehicle. Suppose the loan borrowed was 41% of the resale value of the car used to secure it; defaulting payment could translate to losing more than twice the value borrowed. Therefore, as a borrower, it is crucial that you contact your lender and discuss alternative payment arrangements if you are unable to pay on time.
In addition, the cost incurred when you borrow a title loan can also be assessed quantitatively using the annual percentage rate (APR), a percentage expression of the annual cost incurred in interest accrued and fees paid when you borrow a title loan. The average APR incurred by borrowing title loans is estimated to be about 300% for single-payment loans.
A title loan refers to a line of credit issued to a personal loan client under the condition that they secure the loan with their automobile title. The amount offered as an auto loan depends on the equity held in the automobile. The value of the equity held in a particular vehicle is equivalent to its current resale price. Most title loan lenders offer borrowers a loan valued within a range of 25% to 50% of the vehicle’s equity.