A title loan, or car title loan is a short-term loan secured by the title to your car. Title loans are only legal in certain states, check the laws in your state prior to considering a title loan.
What Is a Title Loan?
With a title loan the borrower gives the lender the title to their car as collateral for the loan. The loans are usually for a short period of time, 30 days is common. The interest rates are generally quite high.
According to the Federal Trade Commission, consumers should be very cautious about taking out a title loan. First of all, it's important to realize that the lender takes the title to your car as collateral. If you don't pay back the loan, you will lose your car. The lender will sell the car to recoup the money that they lent to you.
Second, the interest rates of these loans are quite high. The FTC cites interest rates as high as 25% a month. Often there are add-on costs to the loans that can boost interest rates even higher.
How Does a Title Loan Work?
Title loans are often compared to payday loans. These loans generally don't require a credit check and can seem like an easy way to get some short-term cash. Title loans are geared toward lower-income borrowers with poor credit who are unlikely to qualify for more conventional loans at lower interest rates.
To start you will need to own your car free and clear in most cases. Once you are approved for the loan you surrender your title to the lender.
You can generally continue to drive your car while the loan is outstanding, but some lenders will attach a GPS device to the car and/or take copies of the keys. This makes it easier to repossess the car if you default on the loan. They might even install a device that can prevent you from starting the car if your payment is overdue, or simply as a reminder to make your payment. In the latter case the lender will send you a code that enables you to start the car.
The loans are generally for periods as short as 15 to 30 days but can run up to a year in some cases.
What Are the Risks of Title Loans?
Some experts have likened title loans to predatory lending. Predatory lending generally entails loans to lower-income Americans who have few alternatives as far as meeting a cash shortfall. These loans often have very high interest rates that make them difficult, if not impossible to repay for many borrowers.
The cash need might be for a medical emergency, to pay rent or just to make ends meet.
Title loans carry a lot of risk. The high interest rates can quickly multiply the amount that has to be repaid to two, three or more times the actual amount borrowed. This can make it difficult or impossible for borrowers to repay the loan. They may need to take out another high interest loan to pay off the title loan to avoid losing their car. Many title lenders offer rollovers of the original loans which only serve to make an expensive loan more costly. This buries these borrowers into a deeper debt hole and perpetuates a cycle of debt for people who can ill afford it.
If the borrower can't ultimately pay off the title loan, they will lose their car. The consequences of losing their car might include being unable to get to work, causing them to lose their main source of income.
Alternatives to Title Loans
Depending upon your situation, there are a number of alternatives to a title loan, including:
- Talk to your creditors. They may be willing to grant an extension on your repayment or even renegotiate the terms of your loan. Either is likely a better and lower cost option when compared to a title loan.
- Use a credit card. The interest rate is likely lower than a title loan and you won't need to use your car as collateral.
- Shop around for other, lower-cost, lower-risk sources of credit.
- Work with a credit counseling service.
- Apply for an unsecured personal loan. If you qualify, there is no collateral needed and the cost will likely be quite a bit lower.
- Use your tax refund, if one is due to you, to pay off high-cost debt, or as an emergency fund.
- Borrow money from family or friends if possible.
Title loans are widely advertised on television and elsewhere. While they may seem tempting for those with short-term cash needs, these loans can be costly and dangerous. Statistics vary, but by some counts as many as 20% of title loans end in the owner losing their vehicle.
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