Title Loans: An Expensive Short-Cut To Fast Credit

A title loan is an unsecured short-term loan in which the borrower uses vehicular assets, such as a car, motorcycle or a truck as security to get money instantly. The vehicle’s ownership document or title is kept by the lender until the loan is repaid in full. Title loans are designed for quick access to money. They require minimal paperwork and the loan amount is typically disbursed within a few hours. In such types of loans, the borrower doesn’t need a good credit record or steady source of income, making title loans popular among people who have little or no access to formal credit.

The amount of the loan is typically tied with the resale value of the car, between 25 and 50 per cent of the resale value. After approval of the loan, the borrower gets to keep the vehicle, but the title remains legally in the hands of the lender until the loan is paid off. The catch is that in case you default, your car can be repossessed and auctioned off to recover the dues. Also, the borrower has to take additional insurance cover for the duration of the loan to cover risk of accident and theft, among others. The borrower is also liable for any damage to the car or third party caused by any accident or otherwise during the duration of the loan.

Features of Title Loans

The procedure starts once a borrower hands over the car title, identification papers and some basic documents to the lender. The lender then inspects the car, gauges its market value, and determines the loan amount. Repayment terms are typically short term, between 15 and 30 days, but some lenders offer slightly extended periods.

The rate of interest is also high, around 20-25 per cent a month in some instances, which translates to 300 per cent a year, much higher than any credit card or personal loan. If the borrower defaults on the repayment, the lender can repossess the vehicle without having to go through a long legal procedure.

Most borrowers attempt to escape repossession by rolling over the loan, so they pay only the interest and push the due date further. That may seem easy, but it creates a debt trap. With each rollover, the borrower pays more interest without paying the principal, and it gets much more difficult to come out of the debt cycle.

Why Borrowers Opt for Title Loans

Title loans appeal to those in urgent need of money, but with limited access to other formal credit. They are also used for medical emergencies, rent, vehicle maintenance or immediate family needs. Traditional banks and non-banking financial companies (NBFCs) insist on credit verification and formal salary proofs before disbursing loans, so those with an irregular income, such as gig workers or small businessmen often avail of title loans to access money in an instant.

In other instances, individuals who have credit card bills or personal loans running may resort to title loans to fill short-term needs with the hope of paying back later. The ease with which one can access title loans with practically no lengthy waiting period or paperwork make them a viable option for those in urgent need of cash.

The True Cost of Convenience

The most significant disadvantage of title loans is their high rate of interest. The borrower who borrows Rs 50,000 for 30 days may have to pay Rs 10,000-12,500 as interest only. If the loan gets rolled over even twice, the borrower may have to repay almost the total value of the vehicle within a few months.

Repossession is yet another high-risk factor. Since the loan is secured against the borrower’s car, motorcycle or truck, defaulting on the loan can result in losing it outright. For people who use their car for employment, like taxi drivers or delivery service partners, this can lead to a financial meltdown far more serious than the initial crisis.

Moreover, lenders also charge additional fees for processing, repossession, or late payments, which further increases the overall cost of repayment. Borrowers who are not aware of these conditions end up surprised at how much they have to pay after adding penalties and fees.

What Borrowers Should Watch Out for

Take a title loan only after weighing the benefits and the disadvantages. Always insist on a written contract detailing the rate of interest, repayment terms, and penalties. Never roll over your loan, as it will just add to your overall burden. Verify whether your lender is registered with the local financial authority, as unregulated lenders could demand unfair terms or repossess vehicles illegally.

It is also important to think through alternatives before mortgaging your car.

Title loans appear to be a quick solution, but they have one of the highest costs of borrowing in the lending industry. When you give up your title, you are risking your transportation and means of survival or livelihood. For the majority of borrowers, the short-term relief may not be worth the ultimate risk of losing your vehicle altogether.