Just Say ‘No’ to Car Title Loans

There are several things you shouldn’t do if you find yourself in a financial pinch—namely, rack up a bunch of charges on your credit card or take out a payday loan. But you might not have heard of another option that you must be cautious of: car title loans.

These loans have short-term lending periods (think: 30 days) and use the borrower’s car as collateral. In exchange for the cash, the lender takes possession of the car’s title.

The predatory aspect of these loans is their extremely high interest rates, which are around 20 to 30 times the amount that accompanies credit cards, according to the Center for Responsible Learning, a nonprofit, non-partisan research group. The fact that American consumers paid $3.6 billion in interest on $1.6 billion of these loans last year demonstrates just how sky-high these interest rates actually are.

Car title loans are also extremely risky for borrowers because of the difficulty people have paying back both the principal and the interest that’s due at the end of the brief lending period. As a result, many extend their loan, racking up additional fees and interest charges in the process. (The Center for Responsible Learning reports that the average borrower renews their loan eight times.)

If this cycle continues, the borrower will sink deeper and deeper into debt. And in situations that a loan goes into default, the car is repossessed from the debtor.

If you find yourself hard up for cash, try one of these safe options instead:

A personal loan

With this option, banks and credit unions allow you to borrow money and use it for any number of things—all the while charging you a fair interest rate. (The specific rate you land depends upon your credit history.) In many situations, your loan application can be processed the day you apply and you will receive the funds within just a couple of days.

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Plus, the loan has both a fixed term and a fixed interest rate—so you’ll know exactly how much you owe and for how long before you sign up.

Borrow from family or friends

Once you share your plight with your loved ones, you might be surprised by their generosity. Be honest with them—not only about how much money you need, but also how you got yourself into this predicament. If you do borrow funds, be sure to set up a realistic repayment schedule that fits with your budget.

Once you’ve grown accustomed to making payments any money you’ve borrowed, try to set aside an additional amount in savings on a regular basis. (This will help prevent you from getting into another financial quandary.) To get in the habit, you don’t need to put away a large amount. In fact, saving $10 a week is a great place to start.

Keep socking cash away until you have an emergency account that will cover at least six months’ worth of living expenses. Then, congratulate yourself for working to get out of debt and on the path toward financial success.