Car Title Loans - How Do They Work?

Written By Devi Kristanti on Sunday, October 12, 2014 | 4:14 AM


Car title loans are a way for you to get a much needed loan even if your credit is less than perfect. This type of promissory note is considered a secured loan because you are placing your automobile up as collateral that you will pay the debt back. The lender will keep the title to your car so you won't be able to sell the car while it is being used as collateral but you will be able to drive and have full access to your car.

The downside to this type of loan is the fact that if you fail to pay the debt back, lose contact with the lender and don't honor the legal contract to make payments on the debt, your car can be repossessed by the lender and sold at auction. If this happens you should know you will still be responsible for the difference between what the auctioned car was sold for and the amount originally paid. And unfortunately cars at auction don't always go for their blue book value so you could end up repaying a debt without having the benefit of the car to use if you don't honor the debt.

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One other disadvantage to car title loans is the fact that they are meant to be short term loans and as a result the interest rate is generally higher. On the upside most car loans can be determined quickly so there is no long waiting period to get an answer which is important if you need to get the loan quickly.

There are two types of title loans also known as pink slip loans that you can get. The first one is an interest only loan that will have low payments because you are paying the interest only on the loan, not the principle amount of the loan. This means at the end of the loan period you will still have the initial principle payment to make but this can work if you are only looking for a short term loan and expect to be able to pay the loan off with your tax refund.

The other type of loan is an amortized loan. This type of loan requires the borrower to pay down the principle and interest on the loan with each payment, so at the end of the loan period the entire debt is paid off.

Most states have rules and regulations regarding the amount that can be loaned under car title loans and the amount will vary by the state you reside in but generally the amount of a title loan is less than five thousand dollars.


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