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Collateral Loans vs. Title Loans

When you need cash quickly, there are several options available. However, if you have credit issues or can’t qualify for a traditional loan, what options do you have to get the cash you need? Two options that may be available include collateral loans and title loans. Let’s explore these types of loans to understand which one might be better for you.

What are collateral loans?

A collateral loan, also known as a secured loan, involves borrowing money using personal property as collateral. As the borrower, you pledge your asset(s) to the lender in exchange for a loan. Pawn shop loans are usually the best example of a collateral loan. You don’t need to complete a credit check. You have little to no paperwork to complete, and get your cash on the spot after the lender has assessed the value of your collateral and made a loan offer. If you fail to repay the loan, the lender can legally keep the collateral to recoup their loss on the original loan. However, unlike traditional loans, defaulting on a collateral loan will not affect your credit history.

What are title loans?

A title loan is a short-term secured loan that uses a vehicle title as collateral. The title can be of a car, truck, RV, boat, or motorycycle. With a title loan, the borrower gives their vehicle title to the lender while they continue using the vehicle during the loan term. Like other secured loans, title loans are repaid with interest over a set period of time. However, if the borrower defaults on the loan, the lender could take possession of the vehicle. They will then resell it to cover their loss on the loan.

Title loans are usually offered by specialized lenders or auto loan companies, and they are typically short-term loans. Title loans offer fast cash for people who may not have access to or qualify for other types of traditional financing. However, most states don’t legally allow title loans. So verifying whether title loans are legal in your state before pursuing one is important.

Key differences between collateral loans and title loans

  1. Collateral type

  • Collateral loans: Depending on your situation and the lender, you can secure a collateral loan with a wide range of assets, including small personal items like jewelry, electronics, and sporting goods, all the way up to homes, land, vehicles, and business equipment. The broad range of collateral options means these loan amounts and terms can vary greatly, depending on the value of the collateral offered.
  • Title loans: By definition, title loans are specifically secured by a vehicle title, meaning you must own a car, motorcycle, or other vehicle with a clear title to use it as collateral.
  1. Loan amounts

  • Collateral loans: Again, depending on the lender and the collateral being offered, collateral loans could range from as low as $50 for small personal property items to hundreds or thousands of dollars or more for high-value assets like real estate, business assets, or large pieces of equipment. These loan amounts are determined by assessing the fair market value of the item(s) used for collateral. Loan amounts are usually set at 50% to 80% of the collateral’s value.
  • Title loans: The amount you can get is based on a portion of the vehicle’s value, usually between 25 to 50 percent of the vehicle’s overall value. Depending on your vehicle’s current market value, you could expect to borrow anywhere from $100 to $10,000.
  1. Repayment terms

  • Collateral loans: Depending on the loan amount and type of collateral, repayment could range from 30 days to 90 days or a few months to several years. This makes collateral loans a better option for people who need to make smaller, more manageable payments over an extended period.
  • Title loans: Title loans are usually short-term, with repayment periods often ranging from 30 days to 90 days. Because of this shorter term, the interest rates can be higher, making monthly payments more expensive.
  1. Interest rates and fees

  • Collateral loans: Interest rates are generally lower than those of title loans, especially if the borrower offers collateral that has substantial value. Interest rates also tend to be more competitive because these loans are usually issued by regulated lenders. Banks, credit unions, and pawn shops, must follow specific guidelines by law.
  • Title loans: Title loans often have much higher interest rates, ranging from 25% to 300% APR. Lenders may also charge extra fees for late payments, loan renewals, or other services.
  1. Credit check and approval process

  • Collateral loans: Some collateral lenders – such as banks or credit unions – may conduct credit checks to determine the borrower’s creditworthiness. While a poor credit score might not automatically disqualify you from receiving a collateral loan, it can impact the terms, including the interest rate. However, credit checks aren’t required for smaller collateral loans through pawn shops. The borrower does not need to prove creditworthiness to obtain a loan.
  • Title loans: Title loans generally do not require a credit check. Lenders usually focus more on the vehicle’s value and proof of ownership, making these loans accessible to nearly anyone.
  1. Risks

  • Collateral loans: If you default on or decide not to repay a collateral loan, the lender can seize your collateral to repay the outstanding loan balance. These loans are generally more flexible and less expensive in the long run. As such, they are usually considered low-risk loans with no effect on your credit history.
  • Title loans: Title loans are considered high-risk options. Losing your car can leave you without transportation. It will be difficult to go to work or school, take care of family responsibilities, or complete other daily tasks. As an emergency loan, title loans can provide much-needed cash quickly. However, borrowers tend to get trapped in a fierce debt cycle. In fact, a 2016 study by the Consumer Financial Protection Bureau (CFPB) found that one in five borrowers have had a vehicle seized by a lender after failing to repay their loan. A 2019 survey revealed that more than 80% of borrowers had rolled over their loans or borrowed again shortly after paying off a title loan.

Which loan is right for you?

Both collateral and title loans have pros and cons. The right choice depends on your financial needs, assets, and ability to repay the loan. Collateral loans generally offer larger amounts with more flexible terms. Title loans provide fast, small loans with minimal credit requirements but higher interest rates and significant risks.

Want to learn more? Visit Gene’s Jewelry & Pawn. We’ll help you evaluate your financial situation and find the perfect solution for your needs.

 

Gene's Jewelry & Pawn

Gene’s Jewelry & Pawn is a member of the National Pawnbrokers Association and the South Carolina Pawn Association. With over 35 years of experience in the pawn industry, we have become experts in the collateral loan business. We are passionate about providing you honest, trustworthy, and reliable information about what to expect from a pawn shop.

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For almost 40 years, Gene's Jewelry & Pawn has been providing cash loans and quality products at affordable prices to Charleston, North Charleston, Goose Creek, Moncks Corner and surrounding areas.

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