Also known as a car title loan, a title loan is a loan that requires the borrower to use his or her vehicle as collateral. It is sometimes considered a bad credit loan because lenders usually do not perform a credit check. The interest rates on a title loan can be much higher than a standard loan due to the lack of credit check. When a borrower fails to pay back the loan, the lender can legally claim the borrower’s vehicle and sell it to cover the loan amount. In some jurisdictions, laws regulate this type of loan in order to prevent abuse by lenders.
The process of getting a title loan is often a simple one; in fact, title loan can even be acquired on the Internet. Lenders typically verify the borrower’s collateral and request proof of employment. In most cases, this information can be relayed and approved within 30 minutes, after which the borrower receives the amount of money he or she requested.
Interest rates vary depending on where the loan is acquired, but the rates are generally higher than loans that are given based on credit worthiness. The borrower is required to pay anywhere from 30 percent to more than 600 percent interest at the end of the loan. Some lenders allow the borrower to take out a new loan if he or she cannot pay the first one.
The main risk of not paying back a title loan is that the lender can take possession of the vehicle used to secure the loan. As a title loan is using a vehicle as collateral, if the loan is not paid back, the lender will typically have a right to the car. If a vehicle is repossessed to settle a title loan, the vehicle may not be worth enough to cover the entire loan, in which case the receiver of the loan may still be liable for additional payments. Less severe risks include late fees and high interest rates, which may be levied in accordance to the particular loan agreement.
In some jurisdictions, there are laws in place to prevent lenders from taking advantage of the borrower. For example, the local government might prohibit monthly loan payments that equal more than 50 percent of the borrower’s income and restrict the amount of times a borrower can roll over an old loan into a new one. Without restrictions, a borrower could theoretically roll over his or her balance into a new loan each time the term ended and go further into debt each time.