You do not need a title to a car to apply for a standard auto loan, such as when purchasing a car on credit. However, the title is necessary when you are seeking a loan using your car as collateral. Some banks and credit unions offer long-term installment loans backed by the car and title serving as collateral. The lender keeps the title until you make all payments as agreed.
Considerations
Banks and credit unions may offer competitive rates on personal loans backed by the title to a car. However, other lenders offer so-called car title loans, which usually are short-term loans lasting about 30 days. These loans are very controversial and feature interest rates that exceed 300 percent.
Process
The process for receiving car title loans is simple. The borrower drives the car to the office of a lender offering car title loans and offers to surrender the title on the spot in exchange for an immediate loan worth a portion of the car's value. Usually, the loans are for just a few hundred dollars, although loans for several thousand dollars are available from some car title loan lenders, depending on the value of the vehicle.
Warning
Federal government agencies warn people to stay away from short-term car title loans. Consumer Action's Federal Citizen Information Center reports that lenders can make a copy of the keys to your car -- in addition to taking possession of the title -- when making a car title loan. Also, in some states, lenders can repossess your car without notice after a missed payment. Some of the lenders even plan on the repossession in advance by installing a GPS tracking system in your car before approving a loan. At the time of publication, there are no federal laws governing car title loans.
Alternatives
Borrowing from family or friends is usually better than taking short-term car title loans. People needing short-term loans may find suitable options at their banks or credit unions, including loans that do not require collateral of any kind.
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