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A title loan can be a very useful financial instrument if you utilize it correctly. However, it can also have some scary consequences that are certainly not something you should ignore. Unfortunately, a large number of people sign up for title loans without considering the effects they’ll have to deal with later, and end up disappointed with the financial issues they face as a result. This has created a somewhat negative reputation for title loans.

In reality, when used wisely, they can be just as good as payday loans with no credit check. You just need to understand what you’re getting yourself into, and consider alternative options that could prevent the need for this in the first place.

Understand the Consequences

Defaulting on a title loan has some pretty bad implications. Losing the title to your vehicle is obviously something you would want to avoid at all cost, especially if that vehicle is tied to your main source of income. A title loan may also be more difficult to repay than a regular loan in the first place, because they often come with higher interest rates. You might see rates significantly higher than other types of loans available to you, and that’s completely normal for this sector of the market.

That’s because your credit history is largely irrelevant here. Creditors will only look at the value of your vehicle when determining how much you’re allowed to borrow. Because they have a solid collateral for that loan, they can afford to take the risk and lend out money to people who might potentially have a bad credit score.

Look into Other Options

Try to investigate other lending options first. There should always be something available on the market that does not require you to sign away the title of your car. Of course, be careful with those substitutes – you don’t want to jump from one problematic loan type to another! Borrowing from friends and family is always something you should prioritize before considering an option like a title loan. It might not always be a pleasant experience, but it’s much better to deal with that issue once and be done with it, rather than face the consequences of a botched title loan deal.

Borrow Within Reasonable Limits

If you have an expensive car, you might find yourself facing some great opportunities for borrowing. Many lenders would be willing to go as far as 50% of the car’s value, although you’re more likely to get something around 25% in most cases. This is not necessarily a positive thing though. It may make you more careless, putting you in a state of mind where you’re more likely to borrow a large sum of money. After all, if you’re already planning on repaying the original loan that you wanted to take out, what’s the harm in getting some extra cash, right?

Wrong. That’s the way most people ruin their finances in the first place, and being careless with a title loan is the last thing you want to do when borrowing money. We already listed several reasons for that above. Keep in mind that some companies that deal with title loans may attempt to make a particularly enticing offer to you, as they understand the state of mind most people are in when taking out a loan of this type in the first place.

Be Prepared for Defaulting, But Make Sure You Don’t

Last but not least, understand what will happen if you default on the loan, and have some backup plan for dealing with that. Sure, it might not be pleasant to think about that situation in the first place, but if you’re taking on a risk like that, you need to know that you can deal with whatever it brings about. Losing your car doesn’t have to be the end of the world, although it can certainly mess up your life on a great level. If you need to drive to work, this might prevent you from earning money in the foreseeable future!

That said, look into what you can do to circumvent those problems if they ever arise, and prepare yourself for that situation. But your top priority should still be to avoid defaulting on the loan in the first place. It’s not impossible to prevent that from happening – you just need to be careful when taking out the loan, and know your financial situation well enough to deal with it later on. And if you do things right, you might discover a whole new world of opportunities created by the extra financial freedom that a title loan can provide you with. From then on, you should develop a more responsible attitude towards your finances in general. These things come with time and experience, and you shouldn’t be surprised if you have issues with them in the beginning.

Financing a new car can be a stressful ordeal. There are many variables to watch out for, and you have to carefully explore your available options before settling on anything. Otherwise, you might find yourself stuck making payments for a long time on something that isn’t even up to your standards! Getting ripped off is also a scary possibility, although with a little attentiveness, you should be able to avoid most problems of this type.

It all boils down to doing lots of research, and examining all available options under close scrutiny. You’ll often find that a little patience goes a long way, as it’s not rare that you’ll find an even better deal right around the corner. When it comes to actually settling on a financing deal though, you have to know how to approach that.

Always Negotiate First!

By far the biggest mistake most people tend to make when entering a deal for car financing is that they underestimate the amount of leverage they have in negotiating the price and other conditions. Keep in mind that the initial deal you’re offered will be the absolute best for the other party. With that in mind, try to bring the total down by pointing out various details about the car you’re buying.

You can also negotiate other conditions, not just the total value of the vehicle. For example, monthly installments are something that can affect the deal quite a lot for you, and you shouldn’t ignore the benefits of negotiating those.

Know How Much the Bank Will Finance

Talk to your bank to figure out how much you’ll have to put up as a down payment first. In most cases, you’ll have to cover 20% of the car’s value, and the rest will get handled by the bank itself. However, it might be possible to negotiate a better deal if you’re in a good financial condition. It might even be possible to go up to 100% financed by the bank if you play your cards right. Don’t settle for the first offer you receive, and always try to explore alternatives that might work out better in your specific circumstances.

It might also be possible to negotiate a deal where you sacrifice certain other conditions in favor of better bank financing. It all comes down to the leverage you have available on your side, so make smart use of it!

Are You Overpaying Too Much in the End?

Financing a car means that you’ll end up paying more than the vehicle is worth at the end of the contract. That’s something you should already know and be prepared to deal with. You’d be surprised how many people assume that a financing deal simply allows them to pay off the car’s price over a longer period of time and underestimate the amount of interest and other additional charges they’ll have to pay in the end.

If a deal looks suspiciously good in certain ways – such as by offering you very low interest rates in the beginning, or otherwise trying to entice you in another manner – you can probably assume that there’s some fine print which means that you’ll have paid off a much larger sum at the end of the deal. Always look at those conditions under a microscope and do your own calculations – don’t trust what the bank and/or dealership are telling you! Even if they’re not trying to intentionally mislead you, mistakes can still happen.

Early Repayment Penalties

On the other hand, figure out how much more you’ll have to pay on top of the original charges if you want to pay off your debt earlier. You’d think that a bank would be happy to hear that you want to close your credit line sooner than expected, but this can actually mess up with their own planning to some extent. Because of this, most banks will charge you with an early repayment fee if you want to clear up your debt earlier. Be aware of this, and don’t underestimate how much it can cost you. Look into your contract to find out more details about the situation, and always know what you can expect in terms of a response from the bank.

Car financing often seems like a messy, complicated ordeal, but it’s actually not that difficult to handle it properly if you know what you’re doing, and are prepared for the most common problems that will pop up along the way. For the most part, it can be a relatively painless process that can put you in a very advantageous position. But you have to approach it with the right attitude, and with a lot of relevant information already prepared. Otherwise, you risk falling for some common traps which can otherwise be easily avoided.