For borrowers with subpar credit looking for quick cash, auto pawn loans, or auto title loans, are an option for generating the extra money. Auto pawn loans belong to a greater category called "secured loans," which means that there is collateral involved. In the case of an auto pawn loan, the collateral is a vehicle that the borrower owns free and clear of liens or other restrictions. Because the auto pawn loan is secured using the title of this vehicle, it is subject to initially lower interest rates, and lower credit requirements. However, these short-term loans generally do not work in a borrower's favor, if you cannot pay them off at the end of the term; whether it's two weeks or a month. If unpaid, the collateral vehicle can be repossessed, or the auto loan can be "rolled over" into a new loan, with higher interest rates and more cost.
Auto pawn loans are generally easier to get than some other types of loans, because the owned vehicle acts as collateral, but there are still a few general requirements for qualifying for this type of loan.
Age and ID Verification
Lenders require the borrower to be 18 or older, with a valid driver's license or state identification. This is usually not a sticking point in an auto pawn loan, but it's something to be aware of.
Vehicle Owned Free and Clear
In order to qualify for most auto pawn loans, the driver must own a vehicle free and clear, with no liens on the title. In some cases, a driver can get an auto pawn loan using the title of a vehicle that is almost paid off, but this is not the norm. Generally, the owned vehicle provides qualified collateral that can easily be taken in the case of nonpayment on a current loan.
Vehicle in Good Condition
Most lenders require the vehicle to be in good condition with no extensive body damage, and no disqualifying characteristics such as an extensively damaged engine or transmission. The car must have no rust, no mechanical problems, must be road worthy and pass all emission tests.
Some people try to pass off a car with mechanical problems but good to get the loan. This can cause the loan to be disqualified and penalties to be set in place. Some lenders will require proof that the car is in good condition, either through inspection or paperwork.
Employment and Income Requirements
The lender may not look extensively at the borrower's credit, since there is collateral on hand, but they generally want to know whether the borrower earns enough to pay back the loan on time. That's why many lenders include income requirements for qualification on these types of loans.
Loan Terms and Rollovers
Borrowers will be required to agree to a set loan period, which may be quite short, and a series of rollovers, as a contingency for a non-payment situation.
Take a look at all of these considerations before applying for an auto pawn loan for the best chance at qualifying and securing a new loan.
The Benefits of an Auto Pawn Loan
If you can keep the interest from snowballing, you can enjoy some of the benefits of this type of loan set up.
Fast Access to Cash
One of the best advantages of auto pawn is that the borrower gets really fast cash. Some auto pawn loan lenders have been known to issue the amounts in as quick as 24 hours.
Because auto pawn loans are secured with the title of a car as collateral, they are not subject to some credit requirements, as well as some of the onerous paperwork, that may be involved in other loan types.
Lower Interest Rates
Because, again, the auto pawn loan is secured using the title of a borrower-owned vehicle, it may come with lower interest rates than an unsecured car loan, at least initially. However, buyers should be aware of the high interest rates that may result if the loan is not entirely paid within the original term.
Rollovers Buy Time
Rollovers allow for more time to pay off an auto pawn loan. Without rollovers, the lender would be left with no choice other than to quickly repossess the vehicle and stick the borrower with whatever debt is left over. With rollovers, a borrower has numerous chances to pay off the loan and keep the vehicle that they put up as collateral.
Drive While You Pay
Another great thing about auto pawn loans is that, unlike traditional pawning, when you use your car to finance an auto loan, you can continue to drive that car while they are paying off the loan. The lender will generally hold the title of the vehicle for the period of the loan, but you can still use the vehicle while it is acting as collateral.
Lenders Limit Value
Lenders limit the value of an auto pawn loan to under 50 percent of what the vehicle is actually worth. This prevents borrowers from all kinds of carelessness in racking up debt that would lead to vehicle repossession. Because the vehicle is more valuable than the loan, borrowers are more likely to be cautious in making payments on time and preventing repossessions, which saves everybody a lot of time and hassle. It also prevents some instances of debts being loaded onto a borrower's credit.
These are just some of the benefits to getting an auto pawn loan or auto title loan.
Dangers of Auto Pawn Loans
Financial experts criticize this kind of loan as exploitive, citing the emergence of auto pawn loan services around military bases and in low-income communities. The trouble with a lot of these loans is that borrowers don't understand how quickly they can get into debt. The initial term of an auto pawn loan can be fairly short, as short as a couple of months. After that time, the initial no credit check loans typically roll over into a new loan, that often carries a much higher interest rate. With a 12 percent, the rate can easily become 25 percent, 50 percent or even more than 100 percent. These terribly high interest rates make it almost impossible to pay off the balance, and can trap the borrower in an endless debt cycle.
For example, if the original auto pawn loan is lent at 6 percent for 2 months, the interest does not really build up much. But, if you let that loan "roll over," it gets a new interest rate. Lenders set the interest rates for the rollovers. Say the original 6 percent loan rolls over to a 12 percent rate for 2 more months, and you pay off half of the amount during that time. The remaining amount then rolls over with a much higher interest rate, say, 24 percent. Clearly, multiple rollovers have the ability to create a "debt spiral," where it becomes nearly impossible to pay off the entire loan.
Governments are looking at bad auto loans and how to limit the interest rates in these agreements. Some states have begun to limit the amount of rollovers that can occur on an auto pawn loan. In states that don't have these restrictions, it's incumbent on the borrower to make sure that they limit rollovers themselves, by paying off their loans on time.
The balloon payment is what comes due at the end of the first auto loan period, before the rollover. A rollover doesn't occur unless you can't make that balloon payment. The balloon payment is a large amount of money that the lender has agreed not to collect until the end of the loan. If you have it, fine. If not, they negotiate a rollover.
No Pay, No Vehicle
Failure to repay the loan according to the terms will not only result in the loss of the vehicle, but will destroy any credit status you had up to this point. If you default on this type of loan, future attempts to purchase a home or other large items will be put in jeopardy.
Avoid the Debt Trap
Other dangers inherent with this type loan include the "trapping" consequence that allows you to renew your loan immediately after paying it off, minus the financing charges. So, if paying off your $2,500 auto title loan leaves you with $1,900--you still have $2,500 to pay back next time and, unless you find funds elsewhere to make a payment, you will continue to renew the loan to keep your cash flow afloat. It's costing you $600 per month to stay in this trap, and for many people there is little if any other choice. And, if this rollover includes a rising interest rate, that $600 also increases each month. As time flies by, the gap between what was borrowed and what is owed continues to grow.
Watch out for the Fees
Plus, by law, these types of lenders are allowed associated fees, such as a late fee, that can only help to worsen your financial woes. The late fees get piled on and these too are tagged with interest, increasing your indebtedness.
Loans Never Match Car Value
Although borrowing against an asset like your car might provide you with a short-term amount of cash needed to meet an emergency, the amount a lender will approve will never match any car's market value. But after a few months of successive roll-overs, the amount of money you owe will soon surpass the worth of the car.
You can protect yourself by reading all of your auto financing loan agreements very carefully, and refusing to take on debt that includes excessive interest rates, no matter how the loan is phrased.