If you’re strapped for cash and own your car freely, an auto title loan might seem like a great way to get some quick cash when you need it. But auto title loans are among the most expensive types of credit you can get, along with payday loans and pawnbrokers. All of these loans fall into the category of predatory lending: they target consumers who desperately need money and are therefore willing to pay ridiculously high prices for it.
How title loans work
Auto title loans use your car as collateral. Collateral is property that is used to secure a loan – in other words, it insures the lender against default. If the borrower fails to repay the loan on time, the lender has the right to take any property listed as security for the loan. It’s true: if you don’t repay your auto title loan, the lender can take your car. Some auto title lenders will even ask you to install a GPS device in your car so that if they decide to repossess the vehicle, they can find you wherever you go.
The cost of auto title loans
Auto title loan lenders charge an average of 25% per month interest on the loan. That’s an annual percentage rate (APR) of 300%! Even credit cards only charge an average APR of 15.59%, and these are the most expensive traditional credit options. And you can expect an auto title loan to include a variety of fees in addition to exorbitant interest. In other words, if you were to take out a $1,000 auto title loan and pay it off 30 days later, you would owe the lender $1,250, plus who knows how much in fees.
Alternatives to title loans
Most consumers have much better options than an auto title loan, even if their credit score is low. If you need money because you’re behind on paying your bills, contact your creditors and see if you can negotiate a debt reduction or at least a longer repayment period. If you’re really in over your head, a credit counseling service can help you put a debt repayment plan in place. Other options for getting quick cash include a credit card cash advance (probably very expensive, but not as bad as a car title loan), a loan from a friend or a family member, or a small loan or line of credit from your local bank. Even borrowing money from your 401(k) might be better than taking out an auto title loan.
Once you’ve gotten out of your current financial crisis, make it a priority to set up a emergency savings fund to protect you from similar situations in the future.
Get a title loan
If you decide you really have no choice but to get an auto title loan, shop around with different title lenders to get the best deal possible. Carefully review the terms of the loan and opt out of any “extra” features such as roadside assistance. If the lender insists you take such add-ons, find another lender. Find out about all the different fees listed on the loan documentation (there will likely be several) and try to negotiate to have these fees waived or at least reduced. If you push the lender hard enough, they may be willing to bend these costs a bit. Finally, avoid “rollover” offers. Title lenders will often allow you to pay only the interest on your loan and defer the principal to a new loan, but this will lock you into a never-ending cycle of escalating fees and interest.