Whoever said desperate times call for desperate measures could have been on their way to apply for a title loan. Few situations are desperate enough for title loans to make sense financially, but they’re alluring when consumers are low on options.
What Is a Title Loan?
A title loan is a way to borrow money at an incredibly high interest rate, using your car as collateral.
Title loans offer fast cash and lax approval methods in exchange for the title to your car. If you don’t meet repayment terms in the 15-30 days typically allowed, you could lose your car.
Qualifying for a title loan takes very little time or credit history, so cash-strapped, sub-prime borrowers flock to them. These are short-term, high interest-rate loans that may help in the short run while hindering your long-term financial outlook.
Title loans are banned in 29 states. Four more have loopholes that allow it, but with some restrictions. Still, more than two million individuals a year use their car or truck as collateral for a title loan. One out of six of those people, will have their car repossessed because they didn’t pay back the loan.
How Do Title Loans Work?
Title loan terms range from two to four weeks, sometimes longer. You can borrow 25% to 50% of your car’s value, but loan amounts average around $1,000 and can be as low as $100. Most lenders will require the title, photo ID, and proof of insurance. Some may request an extra set of keys as well. The lender will hold on to your title until you pay off the loan, including finance charges and fees.
Finance fees replace interest rates when repaying the loan. For example, the average monthly finance fee on a title loan is 25%, which equals an interest rate of around 300% APR. Fees are standard throughout the lending world, but title loans often add on excessive processing, document, and origination fees to your final payment
Some more things you should know about title loans:
- You must own the car outright; this means no financed vehicles
- Some title loans require paying for add ons, like roadside assistance
- Credit rating is generally not a factor in qualifying
- You still need to show proof of income
Are Title Loans Bad?
Title loans are expensive and put your property at risk. They target desperate people willing to accept whatever they can get, despite the glaring downsides, which include:
- High-interest rates and fees
- Potential for a debt trap
- Repayment terms of only 15-30 days
- Forfeiture of collateral you posted, such as your car
Above, we stated that the average monthly rate on a title loan was 25% while the average amount was $1,000. This means a one-month, $1,000 title loan with a 25% rate would cost $1,250 to pay off by month’s end.
Another way of putting it: you’re paying $250 for the luxury of borrowing a grand, which you will have to pay back in 30 days. That doesn’t include fees.
If securing $1,000 last month was an issue, you likely will struggle to overcome this new, augmented burden of $1,250. Unless you’re confident in a new source of income or a severe drop in expenses, there’s little reason to believe you’ll have the means to pay off the loan. This is how many consumers get snared in a debt trap.
Borrowers in default are often encouraged to make interest-only payments that roll over the loan every month without ever paying it down. Meanwhile, late fees pile up, adding insult to injury.
Rollovers are loan extensions. Taking the example from above, a lender may offer to roll over your $1,250 for a fee of $250. This means you have 30 more days to pay, but it will cost you another $250, pushing your total to $1,500. Each time the lender extends your loan, it will add another $250 to the total you owe.
On top of all this, lenders usually won’t report payments to credit bureaus, meaning title loans won’t help your credit even if you pay on time.
Alternatives to Title Loans
Lenders that issue title loans target borrowers who need fast cash for emergencies. However, a title loan is more likely to lead to a repossession of your car, than any relief. Borrowers should consider smarter alternatives to title loans before jeopardizing their credit or collateral.
- Personal loans: These loans offer a broad range of rates, terms, and qualification options. If you have a good credit score, you can find a low-rate personal loan for debt consolidation, medical bills, student loan debt, home repairs, and more. Limitations vary by lender, but personal loans can give borrowers ample freedom to use funds how they please.
- Credit cards: A credit card lets you borrow up to a certain limit set by your bank or credit card issuer. The average interest rate is around 16%, but you can nullify interest by paying off purchases before the grace period. Many credit cards offer 0% introductory periods for new members as well. While this is not considered a good option, paying 16%-30% interest on a credit card certainly beats paying 300% on a title loan.
- Borrowing from friends and family: Asking your loved ones for help can be an intelligent financial decision. While not to be taken lightly, family and friends are often glad to help if you show that you’re serious about achieving your goal and paying them back. This is likely where you find the best interest rates and most agreeable repayment terms.
- Payday loans from credit unions: Also known as payday alternative loans or PALs, these loans provide a more affordable option than the traditional payday loan. They offer amounts between $200 and $2,000 with a max APR of 28%. Income is a greater factor in qualifying than credit score, and borrowers must be a member of a credit union to qualify.
- Assistance from local nonprofit or religious organizations: Thousands of organizations are set up nationwide to assist people in financial distress. The trouble often amounts to narrowing down the program that fits your situation and sometimes going through lengthy and detailed application processes. Popular nonprofits include the Salvation Army, the National Urban League, the United Methodist Church, the St. Vincent de Paul Society and the Assistance League. You can find dozens more by searching online at your state and local level.
- Military Lending Act: This law protects active duty service members from predatory lending practices by capping interest rates at 36% for several loan products, including title loans and payday loans.
- Get help managing debt from a credit counselor: A nonprofit credit counselor can help set up a budget and establish a pathway toward financial freedom. If you’re unsure how to proceed financially, a counselor can break down a list of your options, including debt consolidation, debt management, and debt settlement that will help get you out of debt.
Title loans are popular for those with poor credit who need emergency cash. Borrowers are often optimistic, believing they can repay the loan on time despite the sky-high rates and lackluster terms.
Most consumers roll over the loan, which the lender is pulling for. The average title loan gets rolled over 7-8 times, which means you could end up paying $3,000 for the $1,000 you originally borrowed.
There are many alternatives to title loans that borrowers from all credit profiles should consider. If you’re in financial distress, call a nonprofit credit counseling agency and let them give you a free analysis of your situation and the best steps to solve the problem.
This is the best way to retake control of your life and establish a secure financial future.
About The Author
In his 40-plus-year newspaper career, George Morris has written about just about everything -- Super Bowls, evangelists, World War II veterans and ordinary people with extraordinary tales. His work has received multiple honors from the Society of Professional Journalists, the Louisiana-Mississippi Associated Press and the Louisiana Press Association. He avoids debt when he can and pays it off quickly when he can't, and he's only too happy to suggest how you might do the same.
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