Did you know that only 39% of Americans can face a $1,000 emergency?Needless to say, life can hurt us in a variety of situations where you’ll need a substantial influx of cash to safely pass through. In those cases, most people would turn towards their assets, like their cars. Welcome to the world of car finance. If you’ve never heard of title loans, or you’re unaware of how they work, no worries. You’ve come to the right place. Keep on reading to learn everything you need to know about car title loans and how they work.
Car Finance 101: What’s Your Car’s Equity?
Before we start our deep dive into the intricacies of how car title loans work, let’s make sure you’ve got the basics covered.
Whenever auto loans and car title loans are discussed, there’s one figure that you’ll need to keep in mind, and that is your car’s equity.
In the simplest of terms, your car equity is the difference in value between your resale price and the total amount you owe on the car. It’s a quick calculation that can quantify the actual amount that you outright own.
The equity can be put in the form of a dollar amount or even a percentage of your car’s current resale value. For example, you can have a car with a resale value of $7,000, and you still owe around $3,000 on your car loan.
This makes your car equity equal to $4,000, or approximately 57.1% of your resale value.
Calculating My Car’s Equity
You’ll want to have this number on hand before starting any negotiations to borrow money against your car.
After all, how will you know whether you’re getting a good deal if you’re unaware of the worth of your collateral?
The first (and easy) part would be figuring out how much you still owe on your car. You can get that figure by looking at your car loan details. You should find the total amount of money you’ve paid to date, as well as the amount you still owe on your car.
As for figuring out your car’s resale value on the market, you can consult free tools, like the Kelley Blue Book or Edmunds website. Once you fill out their forms, you’ll be able to get a realistic assessment of your vehicle’s resale price, all depending on its conditions.
How to Borrow Against My Car: The Car Title Loans Edition
Now that you have your car’s equity figured out, it’s time to start your search for the right car title loan.
Generally speaking, car title loans can range from $100 to $6,000. It isn’t a loan with a huge value, but the main perk of this form of loan is the swift access to cash.
Your lender will set your car title loan depending on your car equity value. Therefore, the higher your car’s equity value, the more cash you’ll get.
Yet, that doesn’t mean that you’ll be getting a 1:1 ration loan. So, if you have your car’s equity at $4,000, you won’t be getting a car title loan with $4,000. It’ll be around 25% to 50% of your car’s value.
Repaying the Loan: The Process
Title loans are usually due within 15 to 30 days, making them one of the more common short-term loans on the market.
It’s critical to understand how short of duration this loan term can be. If you can’t come up with the full payment at the due date, you’ll be starting a new process of “rolling over” for the loan.
Rolling Over
Basically, this is the process of getting a brand new 30-day loan with the original amount that you couldn’t pay off on time.
The tricky part is the new loan fees added to your new loan, making this a rather expensive way to borrow money.
Figuring Out the Interest Rates
Admittedly, once you see your monthly interest of 25%, you might shrug and think that it’s on average with what you have to pay for your credit card anyway.
Yet, if you stumble into the pitfall of having to carry that loan for a full year, you’ll be facing an annual percentage rate (APR) for your interest that’s around 300%.
What Are My Total Costs to Borrow?
Car title loans are great for getting immediate access to cash funds. But, you need to keep in mind that this is meant to be a short-term loan. Once you’ve started taking the easy way out and rolling over your loan, you’ll be facing interest rates that are quite high.
Adding the title loan fees attached, your car financing option will look a bit expensive.
The Main Disadvantage of Title Loans
In short, once you put your car up for collateral, you should be aware that you’re facing the legitimate risk of losing your car.
If you don’t keep up with your loan payments, your lender will have the legal right to repossess your car and sell it to cover their loss. So, unless you’re certain that you’ve got your personal finances figured out, this might be too high a risk to tolerate for most people.
After all, it’s not only about the car value that you’ll be losing; it’s the negative change in your life’s circumstances. For example, going to work will be much harder without a vehicle, which can increase your commute time.
Also, not having a car can make running errands too much of a pain, like getting the kids to school and grocery shopping.
Ready to Explore Alternative Finance Loans?
We know how overwhelming it can be to have a financial emergency and find that all the traditional avenues of borrowing money are closed to you.
Hopefully, our explainer has shed some light on all the factors you need to know about car finance and getting a car title loan.
Remember to always do your research in picking the right lender and compare rates from different lending services. And, if you liked our article, make sure to check out additional tips and strategies, all available to you in our finance section.