- Title loan
A car title loan, or simply title loan, is a
loanwhere the borrowerprovides their car as collateral. If the borrower defaults, then the lender may take possession of the car. This makes the loan less risky for the lender, and may permit the borrower to obtain a lower interest ratethan they could get on an unsecured loan.
These loans are typically short-term, and tend to carry high
interest rates. They are therefore used mostly by subprimeborrowers with few alternatives. [ [http://www.consumeraffairs.com/news04/2005/ia_car_title_loans.html Iowa Seeks Controls On Car Title Loans] ] 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. In this sense, title loans are broadly similar to the (typically unsecured) payday loans, and sometimes offered by the same non-bank lenders.
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 not be collateral for any other loans (e.g. if it is financed).
The lender will take steps to ensure that if necessary, they can
repossessthe car. They might hold physical possession of the car throughout the term of the loan, or they might keep a duplicate set of keys. Other companies install GPStracking devices; one describes a device that permits the lender to remotely disable and re-enable the car's ignition [ [http://www.consumerfed.org/pdfs/Car_Title_Loan_Report_111705.pdf Driven into Debt] ] .
Depending on the state where the lender is located, interest rates typically range from 36% to as high as 651.79% (APR). The borrower might in some cases be required to make several payments of interest only during the term of the loan. At the end of the term of the loan, the full outstanding amount may be due in a single
balloon 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.
In jurisdictions with rate caps, a similar transaction is sometimes marketed as something other than a loan. One structure is a "sale-leaseback" between the borrower, who sells their car, and the lender, who buys it. The "interest" becomes a lease payment, and the "principal" is repaid when the borrower buys back their car. These structures have attracted regulatory attention; they are forbidden in several US states, including
Social safety net
* [http://www.responsiblelending.org/issues/cartitle/ Center for Responsible Lending] Comments on Car Title Loans
* [http://myfloridalegal.com/pages.nsf/Main/76D0D43D99E8986285256CC9005FB7F0?OpenDocument Florida Attorney General's consumer advice against title loans]
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