Title loan
A car title loan, or simply title loan, is a loan where the borrower provides their car title as collateral for a loan.
These loans are typically short-term, and tend to carry higher interest rates than other sources of credit. Lenders typically do not check the credit history of borrowers for these loans and only consider the value and condition of the vehicle that is being used to secure it. Despite the secured nature of the loan, lenders argue that the comparatively high rates of interest that they charge are necessary. As evidence for this, they point to the increased risk of default on a type of loan that is used almost exclusively by borrowers who are already experiencing financial difficulties.
Most title loans can be acquired in 15 minutes or less on loan amounts as little as $100. Most other financial institutions will not loan under $1000 to someone without any credit as they deem these not profitable and too risky. In addition to verifying the borrower's collateral, many lenders verify that the borrower is employed or has some other source of regular income. The lenders do not generally consider the borrower's credit score.
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[edit] Process
The maximum amount of the loan is determined by the collateral. Typical lenders will offer up to half of the car's resale value, though some will go higher. Most lenders use the Kelley Blue Book to find the resale value of vehicles.[1] The borrower must hold clear title to the car; this means that the car must be paid in full with no liens or current financing. Most lenders will also require the borrower to have full insurance on the vehicle.
Depending on the state where the lender is located, interest rates may range from 36% to well over 100%. Payment schedules vary but at the very least the borrower has to pay the interest due at each due date. At the end of the term of the loan, the full outstanding amount may be due in a single payment. If the borrower is unable to repay the loan at this time, then they can roll the balance over, and take out a new title loan. Government regulation often limits the total number of times that a borrower can roll the loan over, so that they do not remain perpetually in debt.
If the borrower cannot pay back the loan or is late with his or her payments, the title loan lender may seek to take possession of the car and sell it to offset what is owed. Typically lenders choose this option as a last resort because it may take months to recover the vehicle, and repossession, auction and court costs all decrease the amount of money they are able to recoup.[2] During this time, the lender is not collecting payments yet the vehicle is depreciating. Most states require the title loan lender to hold the vehicle for 30 days to allow the borrower to recover it by paying the balance.
[edit] Regulation
There are new regulation that took effect on April 1, 2009, for title loans in Illinois:
- A $4,000 limit on car title loans.[3]
- Restrictions on loans of any amount that would result in monthly payments exceeding 50 percent of the consumers' gross monthly income.
- It will be prohibited for lenders to give loans with balloon payments, thus allowing consumers to repay the loan in equal installments - much like traditional car loans.
- Car title loans can be refinanced, but only if the principal on the loan has been paid down by at least 20 percent.
- Illinois title loans that are refinanced cannot exceed the total outstanding on the original loan.
- The state of Illinois will create a statewide database of current title loans. This is an effort to enforce the above regulations.
- Title loan companies operating in Illinois will be enforced to provide consumers with pamphlets from the Illinois Department of Financial and Professional Regulation outlining options for debt management as well as debtors' rights and responsibilities.
California existing regulations:[4]
- Above $2,500 the rate cap is exempt. Essentially, it's what the lender and borrower agree on.
- Customer must show ability to pay.
- Fully amortized loans.
- Maximum $75 loan processing fee for loans up to $5000, no maximum for loans above.
[edit] See also
[edit] References
- ^ "Frequently Asked Questions About Title Loans". USA Car Title Loan. USA Car Title Loans. http://usacartitleloans.com/faq/.
- ^ "Process of a title loan". http://www.maxcashtitleloans.com/frequently-asked-questions.html/.
- ^ "Rules put brakes on car title loans". Chicago Tribune. March 24, 2009. http://www.chicagotribune.com/business/chi-tue-car-lending-illinois-032mar24,0,7078138.story. Retrieved April 2, 2009.
- ^ "California Finance Codes". California Department of Corporations. June 12, 2009. http://www.corp.ca.gov/. Retrieved June 12, 2009.
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