If you need cash now, an auto title loan might seem like an easy way to get the money you need to pay an unexpected expense.
But be aware: If you don’t repay the high interest loan in time, you will be forced to roll over the loan with additional interest and fees — and possibly lose your car. Before you pledge your car as collateral with a car title lender, consider some less risky options to meet your financial needs.
For a car title loan, you give the lender the title to your vehicle. Car title loans are usually for short-term loans lasting up to 30 days. You have to repay the lender the amount of the loan, finance fees (interest) and any additional fees. You get the title back when you fully repay the loan and all interest and fees.
Although title loans are most common for cars, they are available for trucks, SUVs, motorcycles and other types of vehicles.
The amount you can borrow is usually up to 50% of the vehicle’s value and may depend on whether you still owe money on the original auto loan.
Car title loans typically carry high interest rates and fees. Here’s an example from the Federal Trade Commission:
- Borrow $1,000 for 30 days.
- The lender charges a finance fee of 25% for 30 days, which translates to an annual percentage rate (APR) of about 300%.
- At the end of 30 days, you must pay the lender $250 plus any additional fees.
Lenders may also charge documentation and loan origination fees and could require that you buy a roadside assistance plan.
If you don’t repay the loan, you will have to roll over the loan for another 30 days, with additional finance and other fees. In the example above, you would owe an additional $250 finance fee. At the end of 60 days, you would owe $1,500. Borrowing $1,000 would cost you $500 in this case.
Ultimately, if you don’t repay the loan, the lender can repossess your car and sell it to cover the loan amount.
To apply for a car title loan, the lender will:
- Request to hold the title
- Inspect the vehicle
- Ask for proof of ID
- Ask for proof of insurance
- Ask to hold a duplicate set of keys
- Potentially install a remote engine shut-off device (kill switch)
Why auto title loans are risky
Car title loans may be attractive if an unexpected expense comes up, like the car breaking down. But they are ultimately best avoided if at all possible. Quick cash usually ends up being expensive.
Here are a few reasons why auto title loans are risky:
- Short repayment terms: Car title loans are typically for 15 to 30 days, with some up to 60 days. It may be difficult to repay the loan and the financing fees in such a short period of time. If you don’t pay it back, the loan will roll over with additional interest and fees.
- High interest rates: Although some states cap interest rates for car title loans, interest rates are typically much higher than other alternatives. You end up paying a large portion of the loan amount in interest. You may pay hundreds of dollars in fees and still owe the original loan amount.
- May lose your vehicle: If you don’t repay the loan after several rollovers, the lender will have the right to repossess your vehicle and sell it to cover the loan and fees. In some states, the lender is not required to give you any funds in excess of what you owe on the loan.
- Must own equity in your car: In most states, you must own the vehicle outright to obtain a title loan. That means any loans to purchase it have been repaid.
Talk with your creditors
Ask for more time to pay your bills. Your creditors may be willing to work with you to extend payment terms or skip a payment. Find out if you will have to pay for those services, such as a higher interest rate or additional finance charges.
Consider a credit counselor
Get help to manage your debt with credit counseling. Nonprofit groups offer guidance at little to no cost. Check with a credit union, your employer or local housing authority for credit-counseling services.
Get a personal loan
Apply for a personal loan with a bank or credit union. The loan is based on your credit score and repayment history. The terms will be longer than a car title loan, so the payments may be more manageable. Plus, you won’t put your vehicle at risk. Lenders have special programs for people with low credit scores, and you may be able to obtain a personal loan with a cosigner to qualify more easily. You can also look at quick loans if you’re hoping to speed up the process.
Apply for a payday alternative loan
Many federal credit unions offer payday alternative loans (PAL), which may be based on your current income and ability to repay rather than your credit score.
There are two types: the PAL I offers loans of $200 to $1,000 for terms of one to six months. The PAL II is available for up to $2,000 with a term of one to 12 months. You will have to become a member of the credit union and may need to have income directly deposited to the account.
Charge your credit card
If possible, pay for the expense with a credit card. This is usually less expensive than a payday loan or a car title loan. A 0% intro APR credit card will allow you to avoid interest altogether if you can pay back the loan quickly enough. You can also use a credit card cash advance, which puts cash in your hand instead of paying the expense. The fees and interest rate on a cash advance are higher than a credit card purchase but still less expensive than some other options.
