If you own a car free and clear, but need some quick cash, you may find yourself leaning toward a title loan. This could be the first step down a slippery slope – one you should avoid. Here, we discuss just how dangerous these loans are and why.
How Title Loans Work
Auto title loans are a type of secured loan that uses your vehicle title as collateral. This means that if you fail to repay the loan as agreed, the lender has a right to repossess your car. These loans typically range between $100 and $1,000, and you’re expected to pay them back either within 30 days in a single payment, or in installments – typically in renewals ranging from three to six months.
According to a Consumer Finance Protection Bureau study done in 2016, one in five borrowers get their vehicle repossessed as a result of these loans. Also, more often than not, borrowers can’t afford to repay their loans in a single payment, so they wind up renewing their loan seven or more times in a row, leaving them trapped in a cycle of debt that can last the better part of a year or longer.
Auto title loans, along with payday advance loans and pawnshop loans, are typically thought of as types of predatory lending. Due to the incredibly high interest rates that come with title loans – an average APR on an auto title loan is 300 percent – people often have trouble making their full repayment on time.
With a typical interest rate of 25 percent per month, a loan of $1,000 costs you $1,250 to pay back. When a consumer can’t meet that payment within 30 days, lenders typically allow you to “roll over” your loan. This is where people get trapped in the debt cycle. If you pay $250 and roll over your original loan amount, which has added fees and interest, you still owe $1,250 or more in another 30 days.
There are other factors that make these loans dangerous, like add-ons, which can increase the cost. Adds-ons like roadside assistance, credit report fees, and origination fees not only increase the cost of a title loan, but may be required instead of optional. Knowing this, if you absolutely must get a title loan, it’s a very good idea to shop around before you sign any paperwork.
Car title lenders are required by the Truth in Lending Act to give you the full terms of the loan in writing. You should also make sure you know your credit score and what’s on your credit reports, and have full coverage auto insurance before you sign up for an auto title loan.
Before Getting a Bad Credit Auto Title Loan...
You want to make sure that you look into all your options before considering a title loan. Not only can your vehicle be repossessed, but there are a number of other consequences as well.
For instance, your auto insurance company may decide to pay the lienholder directly if you’re involved in an accident and your car is determined to be a total loss. In some states, title loan companies are required to pay you the difference between the vehicle’s value and the loan balance. But, in other states, they’re allowed to keep the full payout from your insurance company.
What’s more, since you hand over your title as collateral, if something happens to your car, such as it being stolen or totaled, you won’t be able to get financed for a replacement until you pay off your title loan – especially if you have bad credit.
Before signing on the dotted line for a high interest auto title loan, consider these alternatives if you have bad credit:
- Contact your creditors to communicate your situation and see if they can work with you
- Ask friends or family members for some cash to get you through
- Take out a small personal loan from a credit union or bank
- Check out organizations that assist with living expenses
- Consider a cash advance from a credit card, or ask your employer
- Borrow from your 401(k) retirement account
As you can see, there are other options to consider. However, some of them also carry higher than average interest rates, such as cash advances from credit cards. Other options, such as borrowing from your retirement or 401(k) accounts, should be done with extreme caution and consideration.
As We See It
You should always be aware of every option available to you if you need financial assistance. But, you should also be cautious, because not all lender options are as good as they seem. Here at Auto Credit Express, we recommend always doing your research before jumping into any type of auto loan, especially an auto title loan.