A title loan is a common loan option for those in need of fast cash. You can apply for a title loan in person or online, and the loan is usually funded in a matter of hours, not days. Getting a title loan does not require a good credit score, because there isn’t a credit check when you apply for one.
All you need for a title loan is a car that you own, and it must have a lien-free title. However, this does rule out those people who are still paying off their auto loans.
What can you do if you need money but you haven’t finished paying off your car yet? Fortunately, there are still lenders out there who will issue you a title loan, although in this case it will be an auto equity loan. Here’s everything you need to know about getting a title loan on a financed car.
How Auto Equity Loans Differ from Title Loans
Because you’re using your car as the collateral to secure a title loan, the lender will first calculate the current market value of it using a vehicle value guide and its condition. They will then set a maximum loan amount they can issue you, and this will be a portion of how much your car is worth.
For example, let’s say that you have a car with a current market value of $20,000. It’s common for lenders to loan up to 25 to 50 percent of a car’s value with a title loan, which means the lender may be willing to loan you $5,000 to $10,000. In some states, there are also title loan amount limits, such as $2,500 or $5,000, but title loan requirements in Texas don’t put any cap on amounts.
It will obviously work differently if you haven’t paid off the car in full yet, and as the name suggests, an auto equity loan is based on the amount of equity you’ve built up in your car.
Here’s an example – you purchased a $30,000 and put $8,000 down. You’ve now made $7,000 in payments, leaving you with a loan balance of $15,000. During that time, the car has also depreciated and is now worth $20,000. You have $5,000 of equity in the car, and using the same 25 to 50 percent amount, the lender will likely be willing to loan you $1,000 to $2,500.
The potential problem you could run into is if your car has depreciated at a faster rate than you’ve paid off your loan, in which case you won’t have any equity in it. This makes getting a title loan on a financed car more difficult.
There are lenders who are more flexible regarding lending you money even if you haven’t built up equity in your car. Still, it’s always better if you have equity in the car before you take out a loan against it.
Even though auto equity loans work a bit differently than title loans, they still fall under the same classification when it comes to the law. They need to follow the same federal and state regulations as title loans, and how an auto equity loan works will be about the same as how a title loan works.
Every title loan borrow must be at least 18 years of age due to federal law, but besides that, almost all title loan regulation occurs at the state level. Texas is fairly hands-off when it comes to state title loan regulations, and this gives lenders and borrowers the freedom to set up their own loan agreements.
Title loans are intended to be short-term loans. Texas sets a limit of 180 days on title loan contracts, but most lenders will go with terms of 30 days. This is true both in Texas and other states across the nation. You can shop around for lenders offering to accept installment payments for title loans, but that may be hard to find.
The full title loan payment is due when the term is up, but there is the option of extending your title loan if you can’t pay it off in full. How do you do this? It’s simple, all you need to do is pay whatever you currently owe in interest and fees. This will be much less than the full loan amount, but you will be charged additional interest and fees when you extend the title loan into a new term. Since the term limit in Texas is 180 days, you’ll need to pay your title loan in full when you reach that limit.
Although it costs you more money to extend your title loan, this is a better option than defaulting on the loan. If you default, it gives the lender the right to repossess your car. This is true with both title loans and auto equity loans. Texas doesn’t require the lender to wait any specific period of time after you default to repossess your car, meaning repossession could occur right away or a few days later.
What Happens If Your Car Is Repossessed?
When a lender repossesses a car for a title loan, they typically just sell it, unless the borrower is able to catch up on what they owe. The process can be a little trickier for them when the car is still being financed and hasn’t been paid off yet. They may need to negotiate with the financing company about that.
From your perspective, though, you won’t have a car and you’ll still be financially obligated to pay your auto loan. Getting your car repossessed is bad enough with a title loan, but it’s far worse with an auto equity loan. You’ll be making payments for a car that you don’t have anymore.
Staying Safe with Title Loans
Whether you’re getting a title loan on a financed car or a car that you own outright, you should make sure that you have a plan to pay it back in full. Maybe you’ll be receiving a financial windfall in the form of a tax return or a bonus at work. Or perhaps you plan to work extra hours of overtime. Whatever it is, you need to know how you’ll pay back what you borrow.
Far too many people get the title loan first with no idea of how they’ll repay it. This leads to them paying more in interest and fees as they extend their loans. It’s never easy when you’re dealing with a financial emergency, but don’t let it cloud your judgement and get a loan you can’t pay back.
Getting a title loan on a financed car is possible, although it can be more difficult to find a lender who will issue your loan. We have lenders in our network who can offer these auto equity loans, though, and can connect you with one if that’s what you need. Event though you don’t own the car, the loan will work about the same as a title loan.