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Car Title Loans: Risks and Alternatives

Car title loans are expensive and can put you in a cycle of debt. Consider alternative options.
Aug. 23, 2018
Paying Off Debt, Personal Finance
Car Title Loans: Risks and Alternatives
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Car title loans offer you quick cash — often between $100 and $10,000 — in exchange for your vehicle’s title as collateral. They’re a type of secured loan, one backed by property the lender can take if you don’t pay.

These loans are expensive, with hefty fees and annual percentage rates frequently topping 260%. If you’re in a crunch for cash, you likely have better options, like asking for an advance on your paycheck or a payday alternative loan from a credit union.

How car title loans work

A prospective borrower heads to the lender with the car and its title. The lender assesses the car’s value and offers a loan based on a percentage of that amount. The average loan is $1,000, according to the Pew Charitable Trusts. Borrowers can drive away with the money in less than an hour, but the lender holds on to their title as collateral until the loan is repaid.

There are two kinds of car title loans:

  • Single-payment loans require borrowers to repay in one lump sum, usually 30 days later, and have an average APR of 300%.
  • Installment loans let borrowers make multiple payments, usually over three to six months, and have an average APR of 259%.

Generally, car title lenders have fewer requirements for potential borrowers, such as not checking credit or requiring proof of income.

Why car title loans are risky

Think of car title loans as payday loans’ bully brother.

While their interest rates are lower than those of payday loans, which can have APRs upward of 1,000%, car title loans’ interest rates are by no means low. The upper limit of “affordable” is generally considered to be 36% APR. The fees and cyclical borrowing associated with car title loans make them even more expensive.

And if you can’t pay as agreed, you might lose your vehicle. In fact, 20% of those who take out a short-term, single-payment car title loan will have their cars repossessed, according to a report from the Consumer Financial Protection Bureau.

Car title loans can also lead to a cycle of debt, the CFPB found. A vast majority of single-payment loan borrowers renew their car title loans multiple times, incurring fees each time.  Just 12% of single-payment borrowers repay without renewing the loan, according to the CFPB. One-third of the remaining borrowers renewed their loans seven or more times. For a $1,000 loan, that would mean at least $1,750 in fees alone.

Car title loan alternatives

There are quick-cash options that cost you less — and are less risky — than a car title loan.

Before you take out a car title loan:

Pursue all other options: If none pan out, talk with your creditor to see if you can get more time, work out a payment plan or deal with the short-term financial consequences of not paying, such as late fees.

Alternatives to high-interest loans
1. Ask family and friends for a loan through lending circles or a loan agreement
2. Seek assistance from local nonprofits, charities and religious organizations
3. Get a payday alternative loan from a credit union
4. Ask your employer for a paycheck advance
5. Use an app like Earnin to get a paycheck advance
6. Go to a pawnshop

Compare the cost of taking the loan to not taking it: Figure out the overall cost of not having the funds for your purpose, then weigh it against the typical cost in fees and interest of a car title loan.

If you take out a car title loan, carve out the room in your budget to pay it back as soon as you can. This will help you manage the cost and minimize the risk of having your car repossessed.