What is a title loan? Definition and examples
If you want to get a loan, but perhaps your credit score is not good enough for the amount you require, you may get approved for a title loan. In this type of credit, borrowers use their vehicle as collateral. Collateral is a possession the borrower pledges when agreeing on a loan arrangement. In other words, if he or she defaults, the lender takes possession of that item.
Title loan – a secured loan
In a secured loan arrangement, the borrower has put up an asset, such as a house, vehicle, boat as security or collateral. If the borrower defaults, the lender can seize that asset as it tries to recover the amount it lent.
Therefore, a title loan is a type of secured loan, given that borrowers have put up their vehicles as security.
Wikipedia says the following regarding title loans:
“Borrowers who get title loans must allow a lender to place a lien on their car title, and temporarily surrender the hard copy of their vehicle title, in exchange for a loan amount.”
“When the loan is repaid, the lien is removed, and the car title is returned to its owner. If the borrower defaults on their payments, then the lender is liable to repossess the vehicle and sell it to repay the borrowers’ outstanding debt.”
If you put up your car as collateral, the loan company will typically lend you about one-quarter of its value.
If you have a brilliant startup idea but lack the money required to act on it, applying for a title loan is one of several options. Many budding entrepreneurs approach family members, friends, and even work colleagues.
However, such borrowing has some significant drawbacks. What if your startup goes bust and you cannot pay back the money. How are you going to face your relative, friend, or that person at work?
For some people, dealing with a financial institution is a better option, both for applying for a loan and negotiating alternatives if problems arise. Apart from loans, business finance options for a startup include:
- Crowdfunding – using an online platform where many people invest small amounts each.
- Get a very rich person to invest in your new venture, i.e., an angel investor.
- Approach a firm that specializes in venture capital – a venture capitalist.
These alternative options come with several benefits and one major drawback – you will need to sacrifice some of your independence.
High interest rates
Most financial advisers would not recommend taking out a title loan because of their typically high interest rates. They may seem attractive at the time, especially if you need funds urgently, but you should check out other options too.
Investopedia.com makes the following comment:
“Title loans may sound attractive to individuals with bad credit or people in financial difficulty who need cash fast. However, there are exorbitant costs associated with title loans, especially car title loans, that should give borrowers pause.”
Video – What is a Secured Loan?