Are Car Title Loans a Smart Move? (2021)

• Car title loans are short term loans for small amounts of money.
• Obtaining an auto title loan involves giving the lender title to your vehicle.
• Auto title loans can be subject to high interest rates and fees, which can make them difficult to repay.

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If your bank account doesn’t look so good and you have bad credit, you may have considered a car title loan as a quick way to get cash. While these may only be relatively small amounts of money, auto title loans can be risky if you don’t have good control over your finances.

This article will examine how auto title loans work and assess the benefits and risks of getting one. To help consumers make informed financing decisions, our research team also combed the industry to identify the best auto loan companies.

What Are Car Title Loans?

Unlike payday loans, which serve a similar purpose, auto title loans work by putting your vehicle as collateral. These secured loans are for small amounts of money and often have to be repaid within a short period of time.

The Pew Charitable Trusts reports that the average loan amount is $ 1,000. Since these are short-term loans – usually with terms of between 15 and 30 days – borrowers usually have to pay off the balance all at once.

How Do Car Title Loans Work?

The process for getting an auto title loan is relatively straightforward:

1. First of all, you complete an application. You then show the car, title, and a copy of your photo ID to the lender. You may be asked for a duplicate car key.
2. If the loan is approved, the car title lender exchanges the money and retains the vehicle title.
3. At the time of repayment, you pay the lender a monthly fee in addition to the amount borrowed.

The monthly fees for a vehicle title loan tend to be very high interest. According to the Federal Trade Commission, the average fee is 25%, which works out to an annual percentage rate (APR) of about 300%. It can be costly.

For example, let’s say you take out an auto title loan for $ 500 with a 25% finance charge. Twenty-five percent of $ 500 equals $ 125, which is added to the final amount owed. So, at the time of repayment, you will owe $ 625.

Apply for a car title loan

Borrowers can get auto title loans online and in person. A credit check is particularly absent from the auto title loan application process. This is because the non-payment of the loan means that the lender can repossess your vehicle.

To approve you for a car title loan, most lenders will require a clear title. This means that you have paid for the vehicle. However, some lenders may just need you to prove that you have equity in the vehicle.

Why are car title loans risky?

With an auto title loan, you may not only lose your car, but also find yourself locked in a cycle of debt. If you are unable to repay the loan, the lender may allow you to do a “renewal”. A rollover is when a lender allows you to hold the loan money for an additional 30 days, but makes sure you have to pay additional monthly fees.

Reversals are quite common. In June 2019, the Consumer Finance Protection Bureau (CFPB) surveyed consumers who had obtained auto title loans in the previous six months. He found that 83% of respondents still owed money on their loans.

The CFPB also reported that about 20% of borrowers experience repossession if their loans are not repaid in full. According to Forbes, auto title lenders derive most of their income from allowing borrowers to take out new loans to pay off existing loans. This cycle of small loans turning into long-term debt also ensures business continuity.

What are the advantages and disadvantages of car title loans?

If you are considering taking out an auto title loan to meet unforeseen expenses, you should consider the pros and cons:

Auto title loans can be attractive to borrowers with poor credit because most title lenders do not perform credit checks. Plus, your credit score won’t be affected if you’re late on a payment. That said, getting quick access to cash with an auto title loan rarely justifies the high interest rates and the potential to lose a valuable asset.

Alternatives to car title loans

Since the data behind auto title lending is less than stellar, going down another route is probably a smarter financial decision. Here are some alternatives to displaying your car’s title:

• Payday advance: If you are in good standing with your employer, you may be able to receive part of your salary sooner.
• Friends and family: If you want to avoid a financial institution altogether, try chatting with friends and family to see if you can put together a loan deal with a payment plan.
• Credit card: Credit cards have set limits and you will be charged interest if you do not pay your balance by the end of the billing period. Even so, credit cards have lower interest rates than car title loans.
• Personal loans: These installment loans can be used for almost any financial need and are available from banks, credit unions, and online lenders. They often have repayment terms of one to five years, and their interest rates are much lower than those on auto title loans.

Best recommendations for auto loans

Whether you’re financing a car or using one as collateral, it’s important to compare options to make sure you’re getting the best rate. It is wise to always read the terms of each loan and check for potential penalties. You can also take advantage of the online prequalification offered by many financial institutions.

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