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. These loans have higher interest rates than other sources of credit due to the fact that the lender typically does not check credit and that the only consideration for the loan is the value and condition of the vehicle.
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. The loan is secured by the title to the vehicle.
The maximum amount of the loan is determined by the collateral. Typical lenders will offer up to 50% of the car's resale value, though some will go higher. 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.
Depending on the state where the lender is located, interest rates typically range from 36% to as high as 651.79% (APR). 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.
A new regulation took effect on April 1 2009, for title loans in Illinois.
- A $4,000 limit on car title loans.
- 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.
- 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.
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