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Car Title Loans, Auto Loans and Leases: Financing Your Vehicle

If you need a new car, the three most common ways to get one are through a loan, a lease, or to pay cash. If you already have a vehicle and want to use it as collateral to borrow money, a car title loan is an option. Loans and leases are entirely different from car title loans. This post will describe all three, along with their pros and cons.

Loans, Leases, and Car Title Loans

The prices of new and used cars have skyrocketed in the last few years. Car manufacturers blame supply chain issues such as chip shortages and inflation. Buyers were able to negotiate discounts on the price of their cars a few years ago. Unfortunately, there’s very little room to bargain anymore. Not many people can afford to pay cash for their vehicles, and so finance them.

You can finance your vehicle by getting a car loan or by leasing your vehicle. You can borrow or lease both new and used cars. On the other hand, a car title loan is a way to use your car as collateral when you need to borrow money for other purposes.

Car loans

We sometimes refer to car loans as car financing or auto financing. This is because you use the funds from a car loan to buy a vehicle. You can apply at the dealership or your financial institution if you want an auto loan. The lender can approve you for a certain amount of money. They base the approval on your income, other monthly obligations, and credit score. Then, the lender will pay the money to the seller to complete the sale.

You’ll need to make payments on the loan until the loan is paid off. Your payments can be weekly, biweekly or monthly. Terms for car loans can be as short as one year or as long as seven years. In most cases, you can pay off the loan early without a penalty.

The loan will usually have a fixed interest rate for the life of the loan. The interest rate is included in your payment but makes a difference in the cost of your loan. The higher the rate, the more the loan will cost you. Dealerships can sometimes offer better loan rates than financial institutions, so it’s wise to shop around.

You should ask your lender these questions:

  • What is the interest rate on the loan?
  • How long do I need to make payments before the loan is paid off?
  • How much interest will I pay over the life of the loan?
  • Can I pay it off early without a penalty?
  • What happens if I can’t afford the payments anymore?

The vehicle will be yours once you pay off the loan completely. You’ll have a clear title to your car. 

Pros of car loans

  • Loans have consistent payments you can budget for.
  • Car loans usually have a fixed rate.
  • You can use the loan to buy a new or used car.
  • Car loan interest rates can be very reasonable.
  • You own the vehicle after you pay off the loan.

Cons of car loans

  • The terms can be long-up to seven years.
  • You must repay the loan if you want to get out of it.
  • If you sell it before the end of the loan, you could owe more than the car is worth.
  • You might have car repair bills and loan payments, especially if you buy a used vehicle. 
  • If you don’t make your payments, the lender can repossess your car and damage your credit.

Car lease

Leasing a car is more like renting than buying. You will not own the vehicle at the end of the lease. Leases usually offer cheaper payments than loans because you pay for the vehicle’s depreciation, not the ownership. At the end of the lease, there is typically a buy-out. The buy-out is the amount you can purchase the car for if you want to own it.

With a lease, you’ll make payments for a set term-usually two-to-four years. At the end of the lease, you’ll have various options. Depending on your contract, you might be able to buy the vehicle for the amount stated in the agreement. Or, you can return the car and walk away. You can also upgrade to a new vehicle.

Before you get a lease, ask the following questions:

  • How much is the total payment every month, including taxes?
  • What is the interest rate?
  • How much is the buyout at the end of the lease?
  • What are the restrictions, such as maximum kilometres every year?
  • What happens if I can’t make the payments?

Pros of leases

  • Payments are usually lower than a car loan because you’re not paying for ownership.
  • At the end of the lease, you can buy the car, get into a new one, or walk away.
  • Leases are a great option for people who like to drive newer cars because you can get a new car every few years.
  • Maintenance is usually relatively low because most leased cars are new, and the lease ends before the vehicle needs a lot of repairs.

Cons of leases

  • You own nothing at the end of the term despite making payments for years.
  • Leases have restrictions such as the maximum amount of kilometers you can drive.
  • You must keep the vehicle in excellent condition by fixing any damages.
  • Payments might not be significantly lower than loan payments.
  • If you want to get out of the lease, you might need to buy out the contract.

Car title loan

A car title loan has nothing to do with buying a vehicle. Instead, it’s a way to use your car as collateral to borrow money. Alternative lenders offer car title loans to borrowers who have paid off their car and own it free and clear. You can’t have a loan on your car, and your vehicle can’t be leased if you want a car title loan.

Lenders who offer car title loans usually require that the car be no more than 8 years old. The driver must also have insurance. Car title loans can be as short as a couple of months or a few years. Car title loans give access to credit for borrowers who may not be able to get credit elsewhere.

Pros of car title loans

  • Loan amounts vary depending on the value of your vehicle and how much money you need to borrow.
  • Credit approval is not as strict as most financial institutions.
  • They provide access to credit if you can’t borrow elsewhere.

Cons of car title loans

  • They have very high-interest rates.
  • There are usually many fees associated with the loan.
  • If you can’t make your payments, the company can repossess your vehicle and sell it.
  • You must not owe any money on your vehicle.

What if You Can’t Afford Your Car Anymore?

It’s tricky to buy a car without financing. Car loans and leases are the most popular ways to get a vehicle if you can’t afford to pay cash. Unfortunately, sometimes life happens and we can’t afford to make the payments.

If you’re having a hard time making payments, you could sell the vehicle and pay off the loan. Another option is to downsize to a cheaper car that can make things easier for you financially.

Leases are different. You don’t own the car, so you can’t sell it. However, you can buy out the contract or find someone else to take over the lease. Some organizations help people get out of their leases. Two things to be aware of are the fees they might charge and how it could impact your credit rating.

If you can’t make your payments on your car title loan, the lender will repossess your vehicle. This can damage your credit rating. It can also leave you without a car that you might need to get to work or do other things you need to do.

Reach out for help

If you find yourself in a difficult position financially, the professionals at Allan Marshall and Associates can provide solutions to help you manage your debt. Contact  Allan Marshall and Associates at 1-888-371-8900 for a free consultation to help you recover financially.

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Allan Marshall & Associates Inc.

Allan Marshall & Associates Inc. is a Licensed Insolvency Trustee firm in British Columbia, Alberta & the Maritimes. Our dedicated writing team consists of LIT's, counsellors, and debt administrators that help to write informative articles and answer questions about your debt issues.

We are licensed by the Federal Government of Canada to administer Personal Bankruptcies, Consumer Proposals, other insolvency services such as Credit Counselling. We have the knowledge and experience to assess your situation and offer the best advice for your particular need, whether you are a first time bankrupt or simply struggling to make ends meet.