The situation isn’t good. You’re broke, rent is due next week, and you don’t get paid until the week after that. If you have a car that is fully paid off and the title is in your name, an auto title loan is an option for you to access cash quickly, usually for a short period of time.
Maybe you’ve seen the advertisements for car title loans, but you don’t know anything about them. What are they? How do they work? And can they help you? In this guide, we’ll discuss what how car title loans work, what their pros and cons are and some alternatives to using them.
What are auto title loans?
Car title loans are a type of short-term secured loan. A secured loan means you have some physical property the lender can take back if you fail to pay the loan. With a mortgage, for example, the lender can take back your home if you fail to pay. In this case, you agree to give your car to the lender if you can’t pay back the loan.
You can typically take out a car title loan for 25% to 50% of the value of your car, depending on the lender. The loan is typically due back within 30 days, but in some cases, you can pay back the loan over time just as you would an auto loan.
Why would you want to get a car title loan?
If you need cash quickly and own a car, a car title loan is one option that can help you.
One of the advantages of car title loans is that the lender doesn’t need to check your credit, income or debt load, meaning that anyone who owns a car can get them. However, this can also be a disadvantage. You will be approved for the loan regardless of your ability to pay it back, and this can get you into trouble. If you can’t pay it back they’ll take your car. That’s why most other lenders check your financial details — it’s protection for them and for you.
Why would you want to avoid an auto title loan?
Car title loans are generally a bad idea for most people. In fact, they are even illegal in over half of U.S. states. Car title lenders are also heavily regulated in other states to limit harmful lending practices.
Car title loans are a bad idea because they are just about the most expensive type of debt out there. Some states have capped interest rates at 36% annual percentage rate (APR), but many car title lenders charge 300% APR or more . If you took out a 30-day $1,000 car title loan with a 25% monthly fee (equal to 300% APR), that means you’d need to pay back the full $1,000 plus an extra $250 finance charge within one month.
It’s no wonder that only 12% of people are able to pay back the loan in full after the first month, according to a 2016 Consumer Financial Protection Board report. If you can’t pay it back, you have two options: either let the lender repossess your vehicle, or roll your first loan into a new loan.
More than half of the borrowers end up taking out a series of four rollover loans before they’re able to pay it off or have their car repossessed. By that point, a $1,000 initial loan would have ballooned until you’d need to pay back $2,441 total. Even worse, if you wait an entire year like 12% of people, you’ll need to pay back $14,552!
What’s worse is that 20% of people who enter into this rollover loan sequence ultimately end up losing their vehicle because they can’t repay the loan back. Having your vehicle repossessed can have disastrous consequences, especially if you need your vehicle to get to work. If you can’t work, you won’t be able to pay off the loan, and the lender will sell your car and keep the profits for itself.
What other options do you have if you need quick cash?
If you need quick access to cash, car title loans are not your only option.
You could sell things you’re not using, such as TVs, radios, games, or clothes. Many communities have charities and social services that’ll help people with short-term loans — you can search online or call around for such agencies. You can also ask friends or family members to loan you some money. However, while it’s highly unlikely they will take your car if you don’t pay them back quickly, it can cause friction in the relationship.
If you have a credit card that allows it, you can get a cash advance at any ATM. You can also apply for a small loan at a bank or a peer-to-peer lending service such as LendingClub or Prosper. Many of the peer-to-peer lending services are less strict than banks, so your chances of getting a loan might be better with these companies.
If you do need to take out a car title loan, we recommend shopping around for the best rates and researching each company. You don’t want to go to Bob’s Corner Car Title Loan Shop. Rather, companies such as TFC Title Loans, LoanMart, and Finova Financial, which have good ratings with the Better Business Bureau, are better choices.
Once your need for cash has passed, it’s best to try as hard as possible to save up for an emergency fund. You might even have to take on another job, do side jobs here and there, or sell things. But, it’s the only way you can make sure you don’t need to take out a car title loan in the future.
Learn more about other ways to get quick cash when you need it, and how to start saving up an emergency fund, and shop around for rates on a personal loan.