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An online title loan might be a good option if you are short of cash

A Pew Charitable Trust report shows that approximately 2 million Americans use high-interest auto title loans each year. Online title loans let you borrow money fast & easy and use your vehicle as collateral to secure the loan. 

These title loans work similarly to payday loans and are intended to pay for an emergency or other short-term costs. In exchange for the loan approval, the lender will give you the title of your car until it is fully paid off.

Online title loans can sound appealing as some lenders don’t require credit checks, and you might be able to get funds on the same day. While you are paying off the loan, your car can be driven as usual. Title loans can lead to a vicious cycle of debt that is difficult to reverse.

What’s an online title loan?

Your car’s value can secure car title loans. You can depend on many factors, including the state laws and how much your vehicle is worth. However, the average auto title loan is around $1,000. Online title loans are convenient for those who want to initiate the process online. They can also set up accounts electronically to track your balance and make payments.

Online title loans typically last for one month but may extend up to a year depending upon the state. These loans can often be financed at an annual percentage rate of about 300%. These loans should be used only as a last resort due to the high APRs.

How to get a title loan online

This is how to apply for an online title loan.

Locate your car title. Usually, you’ll need a clear and free title.

Fill out the online application—upload documents. Usually, you’ll need to provide a photo ID and proof of income. Some lenders will not check your credit.

Let the lender review your application and then appraise your car. After you have submitted your online application, documents and received approval from the lender, they may contact you to inquire about the vehicle or the application. 

A lender may ask for an appraisal in person. If this is required, they might visit your home or question that you drive to a shopfront. Lenders may ask for a copy or install a device that tracks or stops the vehicle from starting. This allows them to locate and repossess the vehicle in the event you default on the loan.

Sign the contract. You can also electronically sign it and hand the title over to the dealer.

Receive money. You may be able to have the funds wired directly to your bank account by using an online lender.

While the lender will retain your vehicle’s title while you pay off the debt, you will still be able to drive it as long as you make regular payments. However, keep in mind that approval requirements and the process for applying vary from one state to another.

Online title loans: What are the risks?

While online title loans can seem appealing once you have the cash, the downsides could be too costly.

They can be expensive.

According to the Pew report, an average borrower will pay $1,200 over a one-year loan of $1,000.

Lenders will usually charge interest or fees, but not both. Remember that online title loans usually have an APR of around 300%.

It is easy to increase your debt.

Many borrowers end up paying high fees and interest because they cannot pay back their loans on time. If this happens, the lender might offer to renew the loan or “rollover” it for a fee. This is as long as the state law permits. 

Many borrowers can find themselves in debt when this happens. The Consumer Financial Protection Bureau estimates that about a third of borrowers will rollover title loans six times or more, putting borrowers in debt longer than they planned.

You might lose your car.

The lender can take the vehicle if you default on a loan title. According to a report by the CFPB in 2016, one-fifth of borrowers had their vehicle taken by the lender. If you lose your car and use it to commute to work, your financial situation may worsen.

Scams that are harder to avoid

Bruce McClary, vice-president of communications for the National Foundation for Credit Counseling, says that aside from the high costs, there is another risk when you take out an online title loan. “You don’t know who you’re dealing with.”

Some predatory lenders might hide fees or bury terms on their website, making it difficult to determine what you are getting.

Alternatives for online title loans

McClary advises that credit scores should be checked before you apply for an online title loan. McClary says you might be eligible for other financing options, which could allow you to avoid going to a title lender.

Are you unsure if an online loan for title is right for you? These are some alternatives.

Personal loans Many lenders offer secured or unsecured personal loans. However, your loan terms and approval rate will depend on many factors, including your credit score. Make sure you understand the repayment plan before you apply for any loan. You won’t lose your vehicle or any other property if your loan is unsecured.

Credit card cash advances: Some credit cards issuers might offer an unsecured credit line known as a Cash advance. These loans are short-term and can be taken against your credit card balance. Cash advances can be quite expensive.

Some federal credit unions offer an alternative payday loan. These loans are low-cost and range in price from $200 to $1,000. The interest rate cannot exceed 28%, and the loan must be repaid within one to six months.

Bottom line

Online title loans can provide quick cash, but you might end up paying more than what you expected. According to the CFPB, only 12% of borrowers can repay their loan, fees, and interest in one payment.

McClary states, “It’s not the best way to travel on your financial health journey.” You’re heading in the wrong direction if you use one of these title lenders.

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