When you have a financial emergency and not enough cash on hand, a title loan can provide quick funds. However, this type of loan should be approached carefully. A report by the Consumer Finance Protection Bureau reveals that 20% of borrowers had their vehicles seized because they were not able to repay their debt.
However, if you decide to go this route, here’s what you need to know about the type of cars that are eligible for a title loan.
Car Quality
Since your car is used for collateral, it’s the most important part of the loan equation. There’s not a standard list of acceptable cars, and the condition and shape of your car will determine how much money you qualify for. Also, there is no age limit on acceptable cars. While you might think that a newer car is more valuable than an older car, this isn’t always the case. A 2003 car in excellent condition is more valuable than a 2006 car that hasn’t been maintained very well. Classic cars are another example of older cars that have a high market value. The accident history is also important. A car that has been involved in several accidents would not be worth as much as a car that has never been in an accident.
The make and model of the car would also determine the vehicle’s worth. Some cars depreciate in value faster than other vehicles that maintain their resale value. For example, Toyota usually leads the list of top brands. On the other hand, some vehicles, like the Nissan Leaf, Dodge Challenger, Chevy Camaro, Kia Cadenza, and Volkswagen Beetle, have notoriously bad resale values, according to Forbes.
You can use the online Kelley Blue Book to get a free, accurate estimate of your car’s worth. You would need to input the car’s year, make, model, and mileage, in addition to such factors as whether the car has a manual transmission, navigation system, etc. Armed with an estimate from Kelley Blue Book, you will have some idea of the value of your car – and how much you can expect to borrow.
Cars must have a minimum value to be considered as collateral for a title loan, since the loan amount is usually 25% to 50% of the car’s value. For example, a car worth $5,000 would usually qualify for a $2,500 title loan. However, this amount varies by state, so be sure to check with companies in your area for an accurate qualifying amount. According to TFC Title Loans, in the State of California, a car would need to be worth at least $4,000 – $4,500 to qualify as collateral for a title loan. In Arizona and New Mexico, the company states that the car would need to be worth a minimum of $2,000.
The car will be inspected to determine its worth. If you apply online, you might be asked to submit photos and provide written details regarding the car’s condition. However, you will still be required to take the car to a local title loan office or subsidiary for an in-person inspection.
In addition to cars, you can also get a title loan on other types of vehicles, such as a motorcycle, RV, or boat. These vehicles are subject to the same quality standards as cars.
Car Ownership Status
Ownership is another factor used to determine if your car can be used as collateral. According to TitleMax, it only approves loans for vehicles that don’t have a lien (which means that you don’t own any payments on the car – it belongs to you and you have the title).
Some car title companies, like LoanMart, will allow you to use the car for collateral even if it has not been paid off. However, the value of this type of car would be determined by how much equity is in it. For example, if the car is worth $12,000, but you still owe $7,000, the company would value your car at $5,000.
If you’re considering a company that accepts a car with a lien, it’s very important to find out how the lien will be handled. Some title companies will take a portion of your loan and use it to pay the balance on the original lien. For example, if you take out a $4,000 title loan, but you still owe $2,400 on the car, the title loan company may take $2,400 out of your loan amount and pay off the car – which means the amount of loan money you actually receive is only $2,000. In the event that you can’t repay your loan to the title company, it will now own your car free and clear. However, if you don’t ask the right questions and read the fine print carefully, you might not notice the title company took a portion of your loan to pay your lien until it’s too late.
The names on your title also make a difference at companies like Loan Mart. Let’s say your name is John Smith. If the title is in the name of “John Smith or Betty Smith,” you have the right to use the car as collateral. However, if the title is in the name of “John Smith and Betty Smith,” then Betty would also have to agree to provide documentation (and also be responsible for payments) if you want to use the car for collateral.
If you have a title, but can’t find it, your local Department of Motor Vehicles (DMV) should be able to provide a duplicate copy.
Other Considerations
Since a title loan is based on your vehicle, your income won’t weigh that heavily. If you’re in a financial crunch, this might appear to be a substantial advantage. However, getting a title loan is a decision that should be weighed very carefully. Losing your source of transportation could make your financial situation much worse.
While many people consider title loans a lifesaver, there are also people who have paid exorbitantly high fees. According to the Federal Trade Commission, title loan companies typically charge a 300% annual interest rate. From a financial standpoint, it might be better to consider other ways to borrow money, for example, an employer-based loan. Or, depending on the reason for the loan, you might want to consider working with a credit counselor to arrange an affordable payment plan with your creditors.