"Did you know you can use your car title to get some quick cash?" That's what companies like Check Into Cash and TitleMax claim with their ads. They show happy people getting loan money fast. When you're in a pinch for some extra cash, a car title loan sounds appealing. All you have to do is hand over your title for a little while, and you get the money you need. Then you pay the loan back, retrieve your title and walk away, free and clear.
Usually, when something sounds too good to be true, it is. Car title loans come with major drawbacks and you need to understand what is involved with getting this type of loan, the risks, and some alternatives.
What a Car Title Loan Is
A car title loan is when you use your car as collateral to get a small loan amount, quickly. Usually, the amount will range from $100-$10,000 with the average being about $1,000.The exact amount the lender will be willing to offer you depends on the value of your car. Most lenders will offer anywhere between 25-50% of your car's value. Typically, your car will need to be paid off in full before you can use it to get a loan.
According to NerdWallet, there are two types of car title loans you can get: single payment loans and installment loans. Single payment loans require the borrower to repay the full amount at the end of the loan term (usually 30 days) while installment loans allow monthly repayment (usually for 3-6 months).
When getting a car title loan, you can be in and out with the money in an hour, but the lender will be holding on to your title. Unlike when you first bought your car and got financing, the lender will likely not require a credit check or proof of income to loan you the money. It sounds so easy, what can go wrong?
What's the Catch?
The biggest problem with car title loans is they are very expensive. To get the "quick, easy cash" you're promised by the lender will require you to pay up the wazoo in interest. Another concern is that you may be forced to part ways with your car in the event you can't pay off the loan.
Outrageously high interest and fees
The typical APR for a single payment loan is 300% while installment loans carry an average APR of 259% - no, we didn't forget the decimal points here. On top of the high interest, you'll also encounter additional fees that will need to be paid at the end of the loan.
The short repayment period makes it very difficult for most borrowers to (legally) come up with the money to repay it in such a quick timeframe. If the loan is not repaid, the car gets repossessed. As a result, many will extend the loan creating a cycle of debt for themselves that makes it very difficult to dig their way out. NerdWallet reports that only 12% of single payment borrowers repaid their loan without extending. Some extended up to 7 or more times, leading to fees of double the amount borrowed.
Can't pay? Say goodbye to your ride
It's no surprise that your car can be repossessed if you don't pay back the loan, the lender is holding on to your title after all. However, many borrowers will be overly optimistic about how quickly they will be able to come up with the money and they do not factor in the high interest we addressed above. Many borrowers take out a car title loan in order to pay day to day expenses like groceries, utilities or medical expenses. For some people, having a car repossessed means not being able to get to work and ending up in an even tougher position.
Due to the high interest and fees associated with a car title loan, along with the risk of getting your car repossessed, this type of loan should be your last resort. There are several other ways to come up with extra cash that won't put you at risk of losing your source of mobility.
Ask family and friends
While it may not feel good, asking for help from loved ones will be a less risky choice. Many borrowers that take on a car title loan end up having to ask for help anyway when they can't pay it off.
A personal loan comes with high-interest rates as well (between 6%-36%) but you can sometimes negotiate a longer-term loan at better rates.
Drive for ride-sharing companies
Trade in your car
Is there a more affordable car you can buy after selling your car? You may be able to get some extra cash through downgrading your car. Although this doesn't sound like a fun option, a less expensive car is a lot better than no car at all.
If you're considering taking out a car title loan, make sure you're aware of the terms and conditions like the interest rates and fees. You should fully understand all the risks before handing over your title.