If you’re strapped for cash and the bills are piling up, an auto title loan could be the quick fix you’re looking for, especially if you have bad credit. These are short-term, secured loans, meaning collateral is required to get the loan. In this case, your car is used as collateral.
You can quickly access the funds you need by giving the lender the title to your vehicle in exchange for a small amount of money over a short period.
Auto title loans should be used as a last resort and reserved for emergencies only, as the interest rates are extremely high– typically around 300% — and you risk repossession of your vehicle.
“Title and payday loans are sometimes an unfortunate necessity for a large percentage of our underserved and/or underprivileged communities that don’t have access to traditional financing, generally due to lack of credit or bad credit,” says Jacklyn Shapiro,Co-Founder & Managing Partner of Shapiro Hurst & Associates, LLC, a credit counseling service in Texas.
She adds, “Although our economy is on the rise, there is a large percentage of the adult population that doesn’t have access to an emergency fund of even $500. Because of this, they are forced to resort to payday and title loans.
If you are forced into having to choose between the lesser of two evils, a title loan typically has a lower interest rate than a payday loan because there is collateral for the loan.”
If you’re seeking a title loan, here are some tips on how to go about getting one.
How to apply
To apply, you’ll need an i.d., the title to the car with your name on it, and proof of income. Some companies allow you to apply for an auto title loan online.
However, if you’re able to apply in person, you’ll get the money you need much faster because your car can be inspected and appraised right on the spot.
Shapiro emphasizes again that, although applying for these types of loans is not difficult, it should be a last resort.
“For the families that don’t have other alternatives, these loans can be the difference between having food on the table or a warm home to sleep in, but they can also cause additional financial stress.”
How to qualify
Most lenders require you to be at least 18 years old and own a lien-free vehicle. The title has to be in your name, and the vehicle must be completely paid off– you can’t get an auto title loan if you’re still paying off another loan on the car.
The amount you qualify for will be determined by the current value of your vehicle.
The good news is that you’ll still have use of your vehicle when you take out a title loan. However, if you default on the loan, the lender will seize your car and sell it to recoup the amount of the loan.
Cycle of debt
The Consumer Financial Protection Bureau warns that many who take out auto title loans end up either extending the loan by paying a fee or taking out a subsequent loan soon after paying off the first one. They call this quick reborrowing a “loan sequence.”
The CFPB reports that approximately a third of borrowers involved in loan sequences end up defaulting, and one in five have their car repossessed.
If you’ve read the warnings and still want to take out an auto title loan, make sure you shop around for the best option.
5 fast-cash alternatives
Here are five ideas to try before taking out an auto title loan.
1) Sell stuff
If you have anything of value, maybe an instrument or television that you no longer need, consider selling it either at a garage sale or online. This will require giving something up, but then you won’t be weighed down by a loan with an extremely high interest rate.
2) Get a side job
Consider a getting a side job to help increase your monthly income. The good news is that it’s easier than ever to find the right one for you. Even better, there are a ton of options to make money online, many of which can be done from the comfort of your own home.
3) Seek a personal loan
Having bad credit doesn’t automatically disqualify you from the more desirable options, such as personal loans. There are lenders out there who will consider lending to borrowers with bad credit. You just need to know your options.
4) Get a credit card
5) Go to a pawn shop
Pawn shops also have high interest rates, but if you default on this type of loan, you’ll only be losing a personal item and not your means of transportation.
If an auto title loan turns out to be your best option in a time of financial need, make sure you do your research and understand the terms of the loan agreement before committing. And remember to pay it off as fast as possible to avoid going even deeper into debt.