Auto pawn loans have been around for decades and used to be much more popular than the typical car title loans we see today. With an auto pawn, you are handing over the actual vehicle to a lender or pawnshop as collateral for a secured loan. Fall behind on the loan and you risk losing your vehicle as the lender has the right to sell it at auction. Auto pawn companies are typically more lenient when it comes to how much they lend because the loan is backed up by an actual vehicle and they do not need to deal with a repossession.
Lenders take on these types of secured transactions because it is guaranteed so that the loan will be paid. If the borrower defaults, the lender simply goes through the standard legal channels to keep the vehicle after filing the necessary paperwork. The lenders are also more understanding since they are working with something they can liquidate quickly to recoup their losses, whereas other types of lenders are not as cut and dried. The good news for someone considering an auto pawn is that the interest or APR will sometimes be lower as there is less risk than a typical online title loan.
Benefits Of An Auto Pawn Loan
Auto pawn loans are ideal for bad credit borrowers who are looking for an avenue to raise cash using collateral from their vehicle. Most people who would even consider pawning their car will likely have a bad credit score and can’t qualify for a personal loan offered by a bank or traditional loan company. The application and funding process for this type of loan is simpler, and the amount of the loan is based on the value of the car, not the borrower’s credit history.
How To Qualify for An Auto Pawn Loan
Some lenders will use a borrower’s credit score in determining the loan amount, while others determine eligibility based on the vehicle value. As a borrower, you hand over the vehicle as collateral and there are not many other requirements besides the ability to pay back the loan on time. A recent survey of title loan lenders by the Federal Trade Commission found that half of them required that borrowers have a valid driver’s license and the auto title as collateral. Lenders that provide guaranteed approval online title loans will generally offer a lower loan amount starting out. Once they can extend the terms, the loan’s amount will usually reflect the borrower’s credit rating as well as the vehicle’s current equity, and sometimes even a little more as loan fees.
Most auto pawn companies offer borrowers access to very quick cash, for a price. However, when these consumers are already in a tight financial spot, paying the added interest on the loans can get expensive. Some consumers are tempted to get one of these loans to buy needed items or pay for emergency expenses. Too often, the pawnshop requires payments, and then sometimes the borrower cannot pay the loan and it comes up during the borrower’s next lease or sale at the car dealership.
Difference Between Auto Pawn Loans and Auto Title Loans
Auto pawn loans are different from traditional car title loans in one major way. Yes, you are using your car’s equity as collateral for a loan. But with an auto pawn loan, you are handing over the car as collateral as opposed to a car title or pink slip. This becomes a problem for people who need their vehicle to get to work or otherwise do not want to hand over a vehicle as collateral for a loan. Title loans online give the borrower more security when you consider they can keep driving the vehicle. Most auto pawn loans on the other hand don’t require a pink slip as collateral, and the APR may be lower. Ultimately the risk is much higher with an auto pawn as the pawn shop in your state has your vehicle in their possession.
Another danger for subprime applicants is that these borrowers sometimes become victims of identity theft. It is not uncommon for the borrower’s information to be used by an identity thief in order to obtain a credit card in their name. This would have devastating consequences if you were not aware, and the only way to determine if this has occurred is to check your credit report right away. Make sure that there are no charges in your account that you did not make. Even those seemingly insignificant charges can lower your credit score, and if you do not act quickly to make about them, it can take you time to boost your score back up.
Risks and Drawbacks of an Auto Pawn Loan
Overall, for borrowers with less than perfect credit who need quick access to cash, an auto pawn can potentially be a good option versus other more traditional title loan alternatives. Auto pawn companies, like title loan lenders, tend to offer the minimum amount, which is often about half the car’s value, just so that the loan does not have to be fully repaid. And since the lenders usually advertise that they will give loan quotes for no money down, they will require that you put down a little as a deposit. However, as it was with the car title loan companies, there are some risks that must be considered, in order to protect and serve borrowers. Remember that these businesses also operate on a high risk basis, and the lenders fill in their own risk by operating under their own premise. So, always do your due diligence, and if you are uncertain, then do not get a loan!