September 23, 2019
Understanding Short-Term Loans like Car Title Loans
The loan industry has opened up over the past decade, with prominent, recognized, trustworthy lenders offering new ways to get financing for small purchases. Whether you’re looking to install a new kitchen, get a set of new clothes, or purchase a new computer, there is a wealth of ways you can go about borrowing money that didn’t exist 10 years ago.
Short-term loans are typically the easiest type of loan to get; particularly if you have a less-than-stellar credit rating that means going to a bank is not an option. The Great Recession shook most middle-income families in Kansas and Missouri, and most people are still trying to recover their credit rating to pre-recession days. Instead of offering easier access to short-term loans to people who need it, Midwest banks were more likely to close their doors and only offer loans to the elite.
Thankfully, new businesses stepped in to offer lending solutions to the people who direly needed it. Short-term personal loans and car title loans are now hugely popular as a means to loan a relatively small amount of cash and repay it quickly.
Why Do Banks Not Offer Short Term Loans?
Few banks offer short-term loans. Instead, they specifically require you to take out a minimum sum and repay the loan over a long period of time, typically 3-10 years.
There are a few reasons for this. For one, they use an antiquated system of credit checks and credit ratings to work out whether a person is a risk to loan to. This takes time and money and involves third-party companies who take a cut. It’s easier for the bank if they just loan larger amounts to low-risk individuals so that they can keep operating costs down.
Banks prefer to only deal with larger loans instead of going through all of the hassles of loaning a small sum for a small amount of profit. Only offering loans over a longer period of time means the interest rate can remain low, which looks good on paper. But, over the course of a longer loan, the customer ends up paying more interest, as interest in cumulative.
Finally, short-term loans are often considered a bigger risk for lenders. These types of loans are not normally used for purchases like cars or homes (where the lender could feasibly repossess the item if the customer defaulted on the loan). Customers seeking a short-term loan may be struggling to raise funds from other means, which represents a bigger risk for the lender.
Getting the Best Interest Rates
On the face of it, a personal loan available from financial institutions in cities like Kansas City, MO, Overland Park, KS, and Gladstone, MO is similar to a title loan, but as we shall see, car title loans have some additional benefits.
You get cash to be used for any purpose with the promise that you’ll repay the loan over a set number of months. The lender will gain a percentage on top of the repaid amount, known as the interest.
The longer the repayment period and the bigger the loan, the more interest will accumulate. Therefore, it’s best to find a loan with a low interest rate and pay it back as quickly as possible. For some small purchases, a single-installment 30-day loan is the simplest answer.
Lenders will offer better interest rates for larger loans and where there is less risk that the loan agreement will go sour and they’ll lose the money they’ve lent. One way for the bank to reduce risk is only to lend to people that they perceive to be low risk, such as people with a good credit score and high income.
Another way to more easily secure a loan and lower interest rates is to choose a type of loan that has collateral. This is also known as a secured loan (as opposed to an unsecured loan).
For example, a mortgage on a house in St. Joseph, MO or Kansas City, KS will usually have a lower interest rate than an unsecured personal loan offered to someone in these cities. This is because the loan is secured on the property; if the customer fails to make payments then the lender can repossess the house and sell it, recouping most of their losses.
A personal loan is usually unsecured, meaning that if the customer fails to make repayments on the loan then the lender has fewer ways to reclaim their money. Yes, they can sue the loan customer to get the money they are owed, but it’s a laborious process that costs time and money.
This is the main reason that personal loans without collateral have higher interest rates. The lender is adding on a percentage that’s designed to cover the costs of chasing down the small number of people who ultimately fail to repay their loan.
Personal Loans vs. Car Title Loans
It’s here where we can see why car title loans usually beat short-term loans. Car title loans use your car as collateral, making them a secured loan. The lender can be much more confident about lending you money because the loan is secured on the car. In the unlikely event that you’re unable to repay the loan, the lender can reclaim the car so they don’t lose out on the money they lent you. At the same time, you’re free to keep and use your car as usual.
A car title loan is therefore much easier to get than a short-term personal loan. You should be able to loan a larger sum (up to $4,000 in some cases) and at a lower interest rate than with a personal loan.
As your car is used as collateral, your financial past is much less likely to be a roadblock to getting a car title loan. You can apply for a car title loan online, or come to a Kansas City, Gladstone, Overland Park, or St Joseph short-term loan provider.