Short-term loans with speedy approval are possible with car title loans, but they're typically costly. When applying for an auto title loan, you must give the lender the title to your car as collateral, promising to pay back the loan in full once it is due. A title loan may make sense if you have no other options, such as when you urgently need money for emergency medical care. When you take one of these loans, you risk losing your car, and they are typically more expensive than they are worth.
How Car Title Loans WorkYou must have enough equity in your car to cover the loan if you want to borrow against it. Most of the time, you must have paid off any additional loans used to buy the vehicle, although some lenders may still let you borrow if you're still making payments on a typical auto purchase loan. These loans often range from $100 to $5,500. Your car's value or the amount of equity you have determines how much you can borrow. The more value there is, the more money you can get. Expecting a title loan to cover the vehicle's entire value is unrealistic. Lenders only lend what they can quickly and cheaply recoup if they need to seize and sell the car because they want to make it easy to get their money back. Most lenders offer loans ranging from 25% to 50% of the value of your car. To prevent someone from hiding the automobile instead of paying off the loan, they might additionally place a GPS tracking system on your car. In addition to borrowing against your car from storefront financing providers, your credit union or bank may let you do so.
Repaying the LoanThe repayment period for title loans is typically between 15 and 30 days. That necessitates a rapid cash infusion known as a "balloon payment," which is rarely as simple as you might have hoped. Sometimes, "rolling over" a debt allows you to postpone payments.
Rolling OverYou might obtain a brand-new 30-day loan rather than repaying the existing one. However, because you have to pay new loan fees each time you roll over, it becomes a costly method of borrowing. Sometimes state laws place restrictions on the possibility of rolling over.
Interest RatesIt might not seem that horrible when you discover that your lender charges a 25% interest rate for one month. The annual percentage rate (APR) of interest, on the other hand, comes to nearly 300 percent if you were to repay that debt over an entire year.
Total Costs to BorrowWith title loans, costs are high. In comparison to credit cards, lenders typically charge higher interest rates. State legislation frequently constrains interest rates, yet even those limits are incredibly high. Additionally, getting a title loan usually entails fees, which raise the cost of borrowing. You still have to pay the fee because it is added to your loan balance, even though it isn't labeled "interest." Like payday loans, title loans have a high repayment requirement that could cost you a lot of money to service.
Losing Your CarThe possibility of losing your car is one of the significant issues with title loans. The lender has the right to repossess your car, sell it, and keep a portion of the proceeds if you cannot make payments. According to a May 2016 investigation by the Consumer Financial Protection Bureau, one in five borrowers gets their vehicle repossessed. Because that was the car's worth on the secondary market, lenders frequently keep the entire amount of sales proceeds. Things can quickly get worse if your car is repossessed. It's possible that you won't be able to get to work and keep making money. It will take much longer to travel to and from work. This longer commute will impact your quality of life because it will be challenging for you and your family to handle everyday duties like shopping and bringing the kids to school. Don't risk damaging your car if you don't have to.
Alternatives to Title LoansBefore applying for a title loan, consider your options. Although the choices below may not seem enticing, they might be preferable to collecting money for your title.
- If you must borrow, a personal loan can be your best choice. No collateral is required, and you might be eligible for a reduced rate. Inquire about borrowing with a longer-term loan at your bank or credit union.
- Credit cards are rarely a wise choice for borrowing, but as they are unsecured loans, there is little chance of having them repossessed.
- You might be able to get by on extra income. You will probably come out ahead if you can take on another employee, even for a short time. While the additional labor may not be enjoyable or feasible, it is nevertheless essential to consider.
- Cutting costs is difficult, but if temporary sacrifices will get you through a difficult time without harm, that's a better course of action.
- If you have a more expensive car than you require, downgrade the car. Selling that car, purchasing a less expensive vehicle, and pocketing the difference could help you raise money.