When many people go in search of a smaller loan (for instance: $10,000 or less), they are often surprised to find the banks will not accommodate them because of what they call an “insufficient loan amount”. For most banks, taking out a loan other than for purposes of purchasing a home or a car requires the borrower secure a minimum of $20,000 or more. There are some stated reasons for this, but what it boils down to is the fact that larger banks don’t want to bother with the effort of what they think of as a “small” loan, and that’s regardless of whether you have excellent credit, own property, etc.
To use an analogy; it’s like your favorite pizza restaurant will only serve you a large pizza because they feel it isn’t worth the trouble of making a medium or small.
Why Title Loan Lenders Exist
This is essentially why title loan places like CASH 1 exist. For many, the perception of such places is that they are for those whose credit is questionable, or they don’t have decent enough collateral for what the banks call a smaller loan. But there are plenty of borrowers who only need, say, $5,000 for whatever financial reason and as much as the banks don’t want to deal with the hassle of making smaller loans, these borrowers don’t want to deal with the hassle of taking out a larger loan when they only need a fraction of the required amount.
For instance; we read a news story about a woman who came upon an opportunity to invest in a business. Her credit was near perfect, she owned a home, and two cars, and would have had no trouble getting a larger loan from a large bank. She needed about $7,000 to get in on the ground floor of the investment opportunity, but she did not have the cash on hand, nor did she want to liquidate any of her stock or assets. Her solution was to secure a title loan for about $7,000 using one of her vehicles for collateral. And she was smart about the process. She didn’t rely on the investment opportunity to provide her the funds to repay the loan; she planned to use her regular income to get the loan paid off while she was able to take advantage of her investment opportunity.
To discuss what and why a title or car loan is always secured with collateral, it’s a good idea to take a look at what an unsecured loan is, and also what unsecured debt looks like.
What is an Unsecured Loan?
An unsecured loan can take the form of a student loan; money borrowed to attain a degree in higher education. This kind of loan is specifically designated to cover expenses related to education such as tuition fees, books, supplies and even room and board. Student loans do not have any assets put up as collateral to secure them, and most are backed by the Federal Government, though there are a few private student loan institutions in existence. Surprisingly, these private institutions tend to deal only in secured loans except in the case where the loan is designated for educational purposes.
Another type of unsecured loan is a credit card. The moment you put a charge on your credit card, you’ve just borrowed money from that credit company. That remains a loan until you pay off the balance, but as you have probably already guessed, it is an unsecured loan because there is no collateral involved.
Sometimes banks will offer home improvement loans that do not require collateral. This is usually the equivalent of a sale at a clothing store where the bank is trying to bring in more customers and generate more sales of products (loans), but again, these loans are usually intended for major home refurbishment and require a minimum amount to be borrowed.
Also, some personal and business loans do not require the securement of collateral, but these are not very common and so aren’t worth discussing (generally they require excellent credit and a degree of wealth to borrow).
The Difference between Unsecured Loan and Unsecured Debt
Now, we want to underline a fundamental difference between an unsecured loan and unsecured debt. While all of the above examples of unsecured loans represent unsecured debt, other types of unsecured debt have nothing to do with necessarily borrowing money but represent as though they are a result of borrowing money.
Medical debt is one such example. Anyone who owes money for medical expenses has unsecured debt. This is as though you have a loan but without any collateral to secure it. It may seem obvious, but it is important to know that unsecured debt goes beyond just credit card expenses and similar financial situations. Unpaid medical bills are a form of unsecured debt.
Your utility bills are another example. All unpaid utility expenses are classified as unsecured debt. This does not just include electricity and phone costs. It can also include unpaid Homeowners Association Fees, a lease on an apartment, and other similar types of debt. Such expenses are not counted as debt until they become overdue and/or unpaid (except for an apartment lease, which is money expected on a monthly basis for a determined amount of time).
Why would such things be classified as unsecured debt? Because there was a time – even as recent as a few decades ago – when your possessions could be seized to pay for things like unpaid bills or unfulfilled leases. That is no longer the case, although it should be noted that a debtor can sue anyone in civil court to recoup expenses, and a person with a judgment against them is subject to having their assets forfeited or bank accounts seized.
(side note: if you or someone you know is facing such a civil suit, do not ignore it, even if you do not have any money. Ignoring a civil suit will automatically trigger a judgment against you and then you can be subject to all kinds of asset forfeiture. If you cannot afford a lawyer, go to court representing yourself and take all your credit statements, banks statements, paycheck stubs and anything else that accounts for a financial statement and show it to the judge. You still may lose the case, but you stand a much better chance of winning or at least negotiating than ignoring it.)
Now that we’ve discussed the particulars of secured vs. unsecured loan and debt let us turn our attention to title loans and car loans and the necessity for security in such situations.
Why Are Car Loans Always Secured with Collateral?
For a majority of the population, the two most important and expensive assets they own will be their home and their vehicle. While homes and land tend to appreciate in value, cars do not, even though they do retain some worth (you know the old saying though: the moment you drive a new car off the lot, you lose a third of its value).
For better or for worse, a clear majority of the United States is not covered with adequate public transportation, and so a functioning car is a necessity and not a luxury as it would be considered in Europe. But because of the depreciating value, it is necessary to have collateral to secure the loan for the vehicle. And it’s not just the depreciating value either. One of the key differences between your home and your car is that your vehicle is subject to many more kinds of hazards than is your house. We’re not just talking about traffic accidents, though that is the leading hazard for vehicles, sometimes things as natural as floods or storms that can catch a driver unawares and necessitate some damage, which means depreciation, to the vehicle.
It is due to these factors that lending institutions insist on securing collateral for a car loan or a title loan. If a borrower defaults on a car loan or title loan, then the lender can repossess the vehicle and attempt to get some money by selling it and recouping as much as possible on the loss of the loan. This is one reason why it is important to plan for the repayment of a loan to avoid defaulting.
However, if a borrower does run into tough financial circumstances, it can be possible to renegotiate the loan under new terms. Now, it should be evident that under such circumstances, the new terms will favor the lender, usually in the form of an extra point or two, or a fee. But this is good for the borrower as well because it allows them to keep the vehicle and eventually pay off the loan if financial difficulty becomes an issue.
Lending institutions prefer to use repossession of a vehicle as a last resort. It is better to renegotiate a loan than to go through the hassle of trying to get back some of the loan by selling it in addition to having to put a few black marks on the borrower’s credit report. A paid off secure title loan means that vehicle can be used as collateral again in the future. If you fall under such circumstances during the repayment term of your title loan, make sure you are in constant communication with your lender so they can help you deal with the situation in a manner that will avoid having your vehicle repossessed.
If a person is in consideration for a secure title loan or car loan, they should make sure they have full insurance coverage on the vehicle. In the case of a car loan, the lender will insist on full coverage until the vehicle is paid off, but many title loan institutions do not require this. Since the borrower gets to keep and continue using the vehicle, that means there is a chance something unfortunate could happen to it. With full insurance coverage on the vehicle, a borrower will be able to pay off the loan and begin making plans to replace the car. However, if insurance does not cover the amount of the loan, then the borrower is liable for that unpaid loan portion and will have to contend with that at a time when they probably don’t need such troubles.
But perhaps the most important reason why a car loan or title loan is secured by collateral is just for the simple reason that it allows the lending institution to operate and provide a service to a section of the population that would be otherwise unavailable. Without security for car or title loans, lenders would go out of business quickly, not just because of unpaid debt, but also because such loans would be considered too high risk and then would not be made available to the public. Collateral is what helps ensure the lender can continue doing business in title loans for people who don’t want to borrow a large sum or money.
Collateral Makes Title Loans Possible
Let’s put this succinctly: a title loan using the borrower’s vehicle as collateral allows the borrower to get a loan that would likely be otherwise unavailable to them. Through this process, the borrower can take care of unexpected financial difficulties, benefit from opportunities that arise at the last minute (such as the investor mentioned above), or even supplement funds a borrower might already have, but needs a little more for whatever reason. The security provided by the collateral is what makes these loans possible in the first place. With it, no one would be able to borrow smaller sums of money or borrow money when they have less than good credit.
CASH 1 specializes in loans against your car title and will work with you to come up with a reasonable repayment plan so you can continue to use your vehicle, even if difficulties arise during the repayment term. See us online or call the number on the website and start the application process. We’ll find a title loan that’s right for you.