Are you in a situation where you expect to receive money soon, but not soon enough? If you need to make ends meet immediately but have not-so-great credit, you may be wondering what you can do. One option, if you own your car, is to get a car title loan. But is that a good idea? Here’s what you need to know about car title loans as well as some alternatives to consider.
What is a car title loan?
According to the Federal Trade Commission, a car title loan is a loan you get from a lender in exchange for your car title. Typically, there are fees attached, the loan amount is for 25-50% of the value of the car, and you have to repay it within 15-30 days.
To get the loan, you have to apply with a lender and show them your car, car title, and photo ID. If approved, they will keep your car title and give you the money. You can take your car and the money, but you have to repay the loan by the due date, along with any fees.
Usually, a monthly fee is charged for this type of loan, which can be as much as 25% of the amount you borrow according to the FTC. For example, if you were to borrow $2,000 for 30 days with a 25% monthly fee, you would have to pay back $2,500. When calculated as an annual percentage rate (APR) to compare it to other forms of lending, the Federal Trade Commission (FTC) reports the average 25% auto title loan fee translates to an APR of around 300%.
If you are unable to pay back the loan at the end of the 30-day period, you may be able to pay another monthly fee to rollover the loan for an additional month. However, the lender also may repossess your car and sell it to recoup their loss.
Compare the pros and cons to make a better decision.
- Quick access to money without a credit check
- Expensive compared to other loans
- High-risk as you can lose your vehicle, which is worth more than you borrowed
- Short loan period requires you to pay back the loan and fee in a short amount of time
Being that this type of loan can be expensive and high-risk, it’s a good idea to explore other options before handing over your car title. Here are three alternatives to consider.
Payday loans are unsecured, short-term, high-interest loans. Typically, you borrow an amount under $1,500 for less than 30 days and pay back the loan and applicable fees on your next payday.
You are not required to provide any asset in return for the loan, which lowers the risk for you. With many lenders, you will be evaluated for approval based on documentation that verifies your income, commonly a bank account.
Lendup is a payday lender that offers online-only applications which can be processed in just a few minutes. When approved, funds can be in your account the next business day. The key advantage is preferential rates and terms to repeat customers who have successfully paid their loans in the past. It aims towards educating its customers to help them improve their financial situation.
Check into Cash is another popular payday lender that offers online and in-store applications. It has over 1,000 brick-and-mortar store locations. The lender will also transfer funds within one business day when online applications are approved, and you can walk out with cash if you are approved in-store.
Credit cards provide much better terms for borrowing. Typically, you have a longer period of time to repay debts and you pay far less interest. Additionally, it is an unsecured form of credit and many offer additional rewards when you spend, like the Citi Double Cash card and Discover it Miles card.
You will have a minimum payment due each month, between 2% and 4% of the account’s balance, on average. Once you carry a balance past the grace period (typically about 25 days from the closing of your billing cycle), you will be charged interest on that amount.
Interest and fees will depend on your creditworthiness and the lender you choose. However, it is typically an APR under 25%, which equates to far less than the 300% minimum APR charged by car title loans. The catch is that credit card companies will check your credit, and you have to be approved to access the credit line. Additionally, you may have to wait an average of five to seven business days to get the card in the mail, which may be too long in a financial emergency.
If you have trouble getting approved, you can help yourself in the future by opening a secured credit card, such as the OpenSky Secured Visa or USAA Secured American Express®. With these credit cards, you pay a security deposit upfront to gain a credit line and can build your credit through its use. Another option is to recruit a co-signer with good credit. The co-signer will be held responsible for the activities on the card, so you need to make sure you manage the card responsibly
Unsecured personal loan
Lastly, an unsecured personal loan is a loan issued by a lender for a set amount. Approval is based on an applicant’s creditworthiness. The loan is typically repaid in monthly installments over a set amount of time. In addition to repaying the amount borrowed, interest and fees will also apply. Like credit cards, interest rates are usually set as an APR and are much lower than on a car title loan or payday loan. Additionally, these are unsecured, so assets are not directly at risk.
Because approval for unsecured personal loans depends on creditworthiness, it can be more difficult to get approved if your credit is in bad shape. However, there are many online lenders with varying requirements, which increases your chance of approval. Find out what you qualify for with SuperMoney’s loan offer engine. You simply answer a few questions and then will receive personalized rates from a number of lenders. Furthermore, it doesn’t hurt your credit. Check your rates now.
Get funds without a car title loan
When you are in a pinch, it can be tempting to turn to the easiest and quickest option to get cash fast. Car title loans are known for being accessible, fast, and providing large loan amounts than other subprime loans. But they aren’t cheap and you risk losing your car if you don’t make payments. There are alternatives to consider.
While payday loans aren’t ideal, they don’t require security. Credit cards offer much lower rates, but it may be harder to get approved and it can take some time to get the card. If you have the credit to meet the eligibility criteria, personal loans offer competitive rates.
However, if your credit is bad and you need a larger loan, auto title loans may be your best bet. Consider these options and make the right choice for you.
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.