What Are Car Title Loans & Are They a Ripoff?Laura Martinez • Automotive•Debt Reduction
Tough economic times have people in a financial bind and doing things they haven’t done before. There are those who are living paycheck-to-paycheck when they suddenly get struck with a financial emergency.
What would you do?
Some people turn to “title loans” to give them a quick infusion of cash to tide them over until next paycheck. Are title loans a good option when you’re tight on money or are they a rip-off? And how exactly do they work?
How car title loans work
As the name suggests, a person can borrow money with their car title as collateral. Typically with these loans, there’s no credit check and your application is processed quickly. They’re mainly used as cash advances, and their term is usually 30 days.
The maximum amount someone can borrow varies, but it’s usually no more than 50% of the car’s value. To qualify for the loan, the borrower needs to own the car outright. After assessing the value with an inspection, there is usually a small amount of paperwork and then the money is loaned.
As with payday loans, there are term extensions that some borrowers can take out, but many times this will lead to a cycle of debt with the constant threat of repossession.
Big fees and interest rates
Title loans are not cheap. They tend to have higher interest rates than banks, credit cards, and in some cases, payday loans. As always, there’s a high price for quick cash, and it’s usually to the borrower’s detriment.
When people take out such loans they may see the amount due on the loan, but if they calculated the APR it can be over 100%! Some states, like Florida and Illinois, have placed restrictions on the interest rates and fees charged by these companies. The end result is rates that are still quite high – often around 30% – but more reasonable than in other places.
Too much risk
Putting your car on the line is leaving yourself open to a financially devastating situation. What if an emergency happens and you lose your car? Not only will you be stuck without transportation, but you’ll have given up your car in return for only a fraction of its value.
I think that if someone is having a difficult time paying bills to the point that they need to get a title loan, there is a strong possibility that they can’t afford to replace their car if they lose it.
Don’t think they’ll go after you or they’ll cut you a break? Some title lenders require GPS tracking, and may ask you for a copy of your car’s keys. Lenders do not give out money unless they expect to get it back
How to avoid taking a car title loan
In general terms, you can avoid financial disasters, or at least minimize their impact, by planning ahead and building up an emergency fund. Eliminate excess expenses temporarily or permanently from your budget. Pack your lunch, stay home instead of going to the movies, and cut the cable bill if you have to – any of these are far better than jeopardizing your financial future.
If you can’t cut your budget any further, then consider taking on a second job as an added source of income. Be a waiter or deliver pizzas – do whatever necessary to get more money into your budget. You don’t have to stay at your second job forever.
Save up a comfortable cushion of at least 3-6 months worth of your expenses and you should be able to ride out most emergencies that crop up. If you’re not comfortable at that level, work your way up to 12 months worth of expenses. Stash you funds in a dedicated savings account where you’ll be able to keep it accessible but resist the temptation of dipping into it.
What if you need the money now? Many of the above tips apply. Cut expenses, increase income, etc. If that’s not enough, check with your bank for a short term loan, sell some of your stuff, compare rates against credit card cash advances, or apply for a peer-to-peer (P2P) loan from an outfit like Lending Club. Whatever you do, please think twice before getting a car title loan.
Your thoughts on car title loans
What do you think about title loans? Do they serve a useful need, or are they predatory loans? Have you ever used one? If so, what was your experience like?