Owning a vehicle, or more than one for that matter, is quite standard for most people across Canada. This likely isn’t a surprise to you, but what you may not know is that nearly any owned vehicle can be used as collateral to secure a loan.What is a Vehicle Title Loan?
A vehicle title loan, otherwise known as a car title loan, is any loan that is secured by a vehicle that you fully own. Cars are commonly used for this type of loan, however, other vehicles can be used as well, such as motorcycles, boats, and ATVs.
Part of the agreement is the lender gains ownership of the vehicle’s title while you make payments toward the loan you took out. This means that the lender officially takes ownership of your car until you pay back your debt in full. That being said, you will still be able to drive the vehicle as you wish, so long as you make your payments on time. In the event that you default on your vehicle title loan, your lender will have the option to repossess your vehicle and sell it to recoup any lost money.
A vehicle title loan will give you access to credit, usually, the maximum amount you can get is approximately 50% of the vehicle’s value, although it’s important to keep in mind that this fluctuates based on the lender you work with. Lenders may ask you to get your car appraised, or they may conduct an appraisal themselves, before extending credit, to mitigate their risk and make sure your vehicle still holds some value.
More often than not, vehicle title loans have shorter repayment periods. Although repayment periods can vary significantly depending on the lender, you could be making payments for a few months or possibly years.Who Qualifies For a Vehicle Title Loan?
Generally speaking, it is quite easy for any individual to obtain financing through a vehicle title loan. Of course, you must own a car or vehicle entirely, meaning that you’ve paid off the initial loan and there are no liens against your vehicle. In addition, the vehicle must be worth something, usually extremely old or broken-down vehicles are not accepted for this type of loan. This is because the lender requires the vehicle used to secure the loan to have some value in case you default on the loan.
Vehicle title loans are ideal for people with bad credit or who have had previous financial problems as the primary qualification is owning a vehicle. Often, with this type of loan, other approval factors, such as having a good credit score, do not hold as much weight during the approval process unlike with other forms of lending, such as mortgages.Pros and Cons of Using Your Vehicle to Secure a Loan
As with any form of financing, there will be corresponding advantages and disadvantages. When evaluating the pros and cons, remember to consider your personal financial goals and current financial state. When making any type of financial decision, it’s important to consider your unique needs, what might be a good choice for one person may not be ideal for you.Pros
1. Bad Credit is No Issue
Since you’re using your vehicle to secure the loan, lenders won’t put as much consideration into your credit score as they usually would with other types of loans. People with bad credit benefit from vehicle title loans as well as individuals with no credit history at all.
2. Larger Loans
Because your vehicle is used as collateral, you can often get approved for larger loans when compared to other types of lenders and financing.
3. No Prepayment Penalty
Some loans (but not Borrowell’s!) have prepayment penalties meaning there are fees for paying down a loan earlier than the anticipated finish date. These fees often do not apply with a vehicle title loan.
4. Better Interest Rates
Compared to other non-traditional forms of credit, such as payday loans, vehicle title loans usually have lower interest rates.
5. Fast Cash
Vehicle title loans usually have very rapid processing time, you could obtain money in as little as a few business days. The money from the loan can help with unexpected expenses, rent, monthly bills, school expenses, and emergencies. Cons
1. Lost Vehicle
If you default on the loan, the lender has the right to sell your car to pay down the loan. Not only would you lose your car, but you may also end up in a worse financial position leading to a downward spiral into debt.
Despite lower interest rates compared to payday loans and credit cards, vehicle title loans tend to be more costly than standard loans. Be sure to consider all the costs included in the agreement to ensure you can afford the loan.
3. Hidden Fees
Many vehicle title loans have hidden fees in the contracts that are easy to miss if you skim over the details. These hidden fees can be quite costly, it’s important that you understand all aspects of your contract before you sign.
4. GPS Installation
Vehicle title loan lenders may ask to install a GPS tracker onto your car until you repay the loan in full. This helps the lender mitigate their risk of extending credit in exchange for a vehicle that is still in your control.
5. Partial Value
Lenders won’t extend you credit that is equal to the full value of your car or vehicle. They will only extend credit that is a percentage of your vehicle’s value, usually, the maximum percentage is 50% of the total vehicle’s worth.
6. Bad Lenders
Unfortunately, not all lenders can be trusted, some lenders may try to scam you by offering ridiculously high interest rates. Make sure you do your research and compare lenders before making a final decision if you choose to apply for a vehicle title loan.
How Do I Know If a Vehicle Title Loan Is Right For Me?
The biggest factor you need to consider is whether you can afford the debt you intend to obtain. Once you’ve determined you can afford the debt, there are a few other instances where a vehicle title loan may be the best option.
1. If you’re in need of a bigger loan
People who have applied for larger loans elsewhere, with no luck, could benefit from a vehicle title loan because of the relative leniency in the application process. Of course, your vehicle must be worth enough to get approved.
2. If you have an emergency expense
Sometimes life happens and it’s entirely out of our control. Vehicle title loans are a quick way to get enough cash to cover the cost of emergencies and unexpected expenses.
3. If you want to improve credit
Individuals who have poor credit but stable income could use vehicle title loans to improve their credit. Credit scores are heavily based on payment history. If you can obtain a vehicle title loan and pay it off in time, your credit score could improve for the better.
The Bottom Line
Vehicle title loans can be a great way to gain access to the cash you need quickly. Especially if you’re dealing with a financial issue, such as an unexpected expense or if you have bad credit. Although, it’s important to remember that the convenience and rapidness of a vehicle title loan comes with a price tag in the form of higher interest rates and fees. Be sure to consider if you can afford to manage the cost of a vehicle title loan before proceeding.
Loans Canada is a financial technology company that matches Canadian borrowers to lenders and alternative solution providers.
Editor's Note: This blog was originally published in March 2019 and has been updated for accuracy and comprehensiceness.