Car Title Loans: What you Get & What you Pay

Handing Over Keys
You may have to provide a spare key to your lender. Brand New Images / Getty Images

Car title loans are a way to quickly get a short-term loan, but they’re generally very costly. To get an auto title loan, you’ll need to pledge your vehicle as collateral for the loan (by giving the title to the lender until the loan is completely repaid).

If you’ve got no other options (for example, you need funds for medical treatment), a title loan might make sense. In most cases, they end up being more expensive than they’re worth – and you can even lose your car.

How Car Title Loans Work

To borrow against your vehicle, you need equity in your car. In many cases, you need to own the vehicle free-and-clear, but some lenders allow you to borrow if you’re still paying off a standard auto purchase loan.

The amount you can borrow is based on the value of your car (or your equity in the vehicle). The greater the value, the more you can borrow – but don’t expect to squeeze the full value out of a title loan. Lenders want to make it easy on themselves to get their money back, so they’ll lend only what they can quickly and easily get for the car if they have to repossess the vehicle and sell it.

Title loans are short-term loans, often due within 30 days. That means you have to quickly come up with the funds for a complete repayment (also known as a balloon payment), and that’s rarely as easy as you’d hope. In some cases, you can extend repayment by “rolling over” the loan – instead of paying it off, you get a brand new 30 day loan.

However, rolling over is an extremely expensive way to borrow because you have to pay new loan fees every time you do it. State laws sometimes limit whether or not rolling over is an option.

Costs are high with title loans. Lenders generally charge higher interest rates than you’d pay on credit cards.

State laws often limit interest rates, but those limits are still quite high. What’s more, you typically have to pay fees to get a title loan, and those fees effectively increase your cost of borrowing (even if the cost isn’t called “interest,” you’re still paying it). Like payday loans, title loans can lead to you repaying several times what you borrowed – not just a little bit of interest.

Losing your Car

One of the biggest problems with title loans is the risk of losing your car. If you’re unable to keep up with payments, the lender can take possession of the car, sell it, and keep their share of the money (sometimes they get to keep everything).

If your car is taken, things might get worse quickly. You might not be able to get to work and continue earning an income (or getting to work and back will take substantially longer). It will be more difficult for you and your family to complete daily tasks such as shopping and getting to school. If you don’t have to put your car on the line, don’t do it.

Alternatives

Before you get a title loan, make sure you’ve tried everything else. These options might not be appealing, but they might be your best option.

  • A personal loan is your best option if you must borrow – ask your bank or credit union about borrowing with a longer-term loan at better rates
  • Credit cards are rarely a smart way to borrow, but they are unsecured loans that don’t carry the risk of repossession
  • Extra income might also get you through a rough spot. If you can take on another job – even temporarily – you will most likely come out ahead. It’s not pleasant, and it might not even be possible, but it’s worth evaluating.
  • Cut costs: again, easier said than done, but if temporary sacrifices can get you through a rough spot unscathed, that’s probably a better option.
  • Downgrade: if you have a more expensive car than you need, you might be able to drum up cash by selling that car, buying something less expensive, and keeping the difference.

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