Technically, the most important asset a person can have is a house. If you have a car, you have the option to not pledge your house for a secured loan. You can instead sign a title loan.
A title loan is a common variation of payday loan. This deal is secured by the borrower’s car, and is only available to people who have a clear title to a vehicle (meaning, the car is not a collateral for any other loan). The maximum amount of the loan is computed by considering some fraction of the resale value of the “pledged” car. In addition to this, lenders also verify that the borrower is employed or has some source of regular income.
The most cited weakness of the title loan is that it tends to carry very high interest rates. It is therefore only advisable to subprime borrowers with few alternatives. According to the Center for Responsible Lending, it only traps borrowers in a more dangerous cycle of debt. They argued, “A typical car title loan has a triple-digit annual interest rate, requires repayment within one month, and is made for much less than the value of the car. Car title loans put at high risk an asset that is essential to the well-being of working families — their vehicle.”
Before deciding to sign a title loan, we recommend that you consult a financial advisor first.