The situation is dire. You’re broke, rent is due next week, and you won’t get your paycheck for another 15 days. If your car is fully paid off and the title is in your name, an auto title loan can help. Auto title loans offer access to fast cash, typically with very short loan terms.
But what are auto title loans? How do they work? And can they help you? In this guide, we’ll discuss how car title loans work, their risks, their benefits, and some safer alternatives.
What are auto title loans?
Car title loans are short-term loans secured by your auto title. Because they use your car as collateral, if you fail to pay off your loan in time, the lender can seize your automobile. As such, if you’re not sure that you’ll be able to make your payments on time, auto title loans are a high-risk option.
Typically, you can take out a car title loan for 25% to 50% of the value of your car, though it depends on the lender. You usually have 30 days to pay off the loan, but in some cases, you can pay back the balance over time as you would a standard unsecured loan.
When should you get a car title loan?
Because car title loans are secured by collateral, you don’t need good credit to qualify. Lenders offering car title loans won’t check your credit, income, or debt load — you just need a vehicle that you fully own. So if you need cash quickly, have bad credit, and own a car, a car title loan can be a helpful option.
However, you should only take out a car title loan if you know that you have money coming within the next 30 days (or before the loan term ends). For example, if you’re in a bind and you need some extra cash in advance of your paycheck, an auto title loan is a great solution.
If you don’t have the emergency savings to pay off the loan and don’t have a paycheck around the corner, though, an auto title loan might be too risky. This goes doubly if you use your car for your job, or to commute to work. If you’re not sure you’ll be able to pay the loan off on time, don’t take the risk.
When shouldn’t you get an auto title loan?
Car title loans are so high-risk that they’re illegal in over half of U.S. states. In states were they are legal, car title lenders are heavily regulated to limit harmful lending practices.
Why are car title loans so dangerous? Because they have higher interest rates and shorter loan terms than almost any other loan. Some states cap interest rates at 36% annual percentage rate (APR), but many car title lenders charge 300% APR or more. 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.
What happens if you fail to pay off your auto title loan?
Let’s say you took out a 30-day $1,000 car title loan with a 25% monthly fee (equal to a 300% APR). That means you’d need to pay back the full $1,000, plus an additional $250, all within 30 days. If you fail to do so, you have two options:
- You can let the lender repossess your vehicle, essentially selling your car for the cost of your loan.
- Or you can roll your first loan into a new loan, which will give you just 30 more days to find that money — plus 25% interest on the new balance.
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 has ballooned into $2,441 total. And if you, like 12% of borrowers, roll over your loans for an entire year, you’ll owe a whopping $14,552!
Sadly, 20% of people who start rolling over car title loans ultimately end up losing their vehicle. Having your vehicle repossessed can have disastrous consequences, especially if you need it to get to work. If you can’t work, you can’t pay off the loan, and the lender will sell your car and keep the profits for itself.
In short, are you at all uncertain that you’ll be able to come up with the money (plus up to 25% interest) within a month? Then steer clear of auto title loans.
Where should you get an auto title loan?
If you’ve decided that an auto title loan is right for you, consider these options:
What are some alternatives to auto title loans?
If you need quick access to cash, car title loans are not your only option. Check out the following alternatives:
Sell your possessions
You could sell things you’re not using, such as TVs, radios, games, or clothes.
Ask for help
Many communities have charities and social services that’ll help people with short-term loans — just search online to find them. If that doesn’t pan out, you can also ask friends or family members to loan you some money. However, if you don’t pay them back quickly, it can create friction in the relationship.
If you have a credit card that allows it, you can get a cash advance at any ATM.
Try a peer-to-peer lending service
You can also apply for a small loan at a bank or a peer-to-peer lending service like LendingClub or Prosper. Peer-to-peer lending services are often less strict than banks, improving your chances of getting a loan.
Start an emergency fund
Obviously if you need cash now, you can’t retroactively build an emergency fund. But once your need for cash has passed, you should start saving. After all, having a healthy emergency fund is the best way to make sure you never find yourself in this situation again.
Not sure how to build up an emergency fund? These tips can get you started.
If all else fails, find the most reputable car title lender you can
If you do need to take out a car title loan, we recommend shopping around for the best rates and researching each company. Companies such as TFC Title Loans, LoanMart, and Finova Financial, which have better-than-average customer ratings, are safe choices.
In a very select set of circumstances, an auto title loan could be your best option to get cash fast. Is your credit is too low to qualify you for another loan? And are you 100% certain that you’ll pay your debt on time? If so, an auto title loan can get you the fast cash you need. But be wary. Snowballing debt is no joke. Don’t gamble your car unless you can afford to lose it.
Do you need an auto title loan? Compare auto title lenders side-by-side to get the best (and safest) deal you can!