Title loans are a subcategory of auto financing, and are defined (often as car title loan and pink slip loan) as a secured, short-term alternative. This means that the consumer provides collateral as a guarantee, which comes in the form of the vehicle itself. Throughout the course of the loan, a lien is placed on title of the vehicle, which transfers ownership to the lender. Once the terms of the loan have been met, and the loan repaid in full, the ownership will be transferred back to the consumer. Otherwise, in the event that the borrower defaults on the loan, the lender will seize the car as collateral and attempt to sell it so as to cover the cost of the loan.
In this video, the concept of title loans is explained in further detail by Jennifer Johnson from the Center for Responsible Learning. Below are some features of title loans, as suggested in the video, as well as what can happen if a borrower is caught out and ends up having to default on an title loan:
- Title loans are typically thought of as desperate alternatives, in which the consumer will use their existing vehicle as collateral for a loan.
- Auto title loans are usually small in size, around $250 to $300 but some lenders offer larger sums.
- The balance of the loan is usually due in a balloon payment.
- Given the risk associated with title loans, the APR is usually high. Most title loans will have an APR of around 300%.
- If a borrower can’t pay the loan, their vehicle will be repossessed, leaving the individual or family without a vehicle which can cause difficulties.