Car title loans, sometimes known as just title loans, offer credit-challenged consumers an option for obtaining cash in an emergency. These loans often require little more than a valid car title and some identification, but consumers should exercise caution to avoid expensive debt and the possibility of having the vehicle repossessed.
Car Title
When a consumer takes out a title loan, the lender uses the value of the borrower's car to secure the loan. The lender holds the title to the vehicle during the term of the loan, and may file a legal lien on the vehicle to ensure debt repayment. If the borrower does not repay the loan, the lender may repossess the vehicle and sell it to recover the balance owed. For this reason, title lenders usually require that the borrower own the car outright and have no other liens against the title. According to the lender USAuto Title Loan, borrowers must present the vehicle's title when applying for the loan and verify that they have paid off any outstanding loans that the car secured. In addition, according to the Consumer Federation of America, some lenders require the borrower to provide a set of keys to the vehicle, as these keys will make repossession easier should the need arise.
Identification
USAuto Title Loan notes that borrowers must be at least 18 years old and have a stable, permanent residence. For this reason, title lenders usually require borrowers to present some form of identification, like a driver's license or state ID card, when taking out a title loan. In some cases, the lender may also require a current utility bill bearing the borrower's name; this kind of document re-affirms that the borrower actually lives at the address listed on the driver's license. A valid state-issued identification also helps lenders verify that the borrower actually owns the car used to secure the loan.
Documented Income
Before issuing a title loan, many lenders require borrowers to prove their ability to repay the balance. For some lenders, a collection of recent pay stubs may provide this verification. Other lenders may also require several recent bank statements that show not only the borrower's income, but typical expenditures and other outstanding debts. The Consumer Federation of America notes that title lenders typically cater to credit-challenged customers and, for this reason, rarely require a credit check in addition to the borrower-provided income verification.
Considerations
Because title lenders often cater to credit-challenged customers, the Consumer Federation of America expressed concern in a 2007 document that lenders unfairly target less prosperous clients who may be unable to repay the debt. If the lender repays, according to the Consumer Federation of America's 2007 report, the effective interest rate averages around 300 percent for one-month loans and can climb as high as 780 percent for two-week loans. For this reason, borrowers may consider exploring other options, including credit cards and personal loans, before taking out a title loan.
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