If you need a loan ASAP, chances are you’ve come across lenders offering title loans. On the surface, they look practical. Fill out a loan application, post your car title as collateral, and you could have the money in less than an hour. Even if you have a weakness credit scoreyou will probably still be approved.
Unfortunately, title lenders are predatory and a title loan is a decision most borrowers regret. Here’s why you should avoid title loans at all costs.
1. They have extremely high interest rates
There is no exaggeration how expensive title loans are. They have an average APR of 300%, and no, that’s not a typo. Now, these are short-term loans, but this still corresponds to an interest rate of 25% per month. For comparison, the best personal loans offer APRs well below 10%.
At 300% APR, if you get a $1,000 title loan, it will cost you $250 in interest after just one month. You can get money quickly, but it’s going to cost you. Partly because of these high interest rates, securities lending is banned in 29 states.
2. They have short payback times
The standard repayment term for a title loan is between two weeks and one month. For one thing, it’s not the type of loan you’d want to have for too long, given its cost. But it also makes it difficult to repay your loan on time.
A month or less isn’t a lot of time to improve your financial situation and find all the money you’ve borrowed, plus interest. If you can’t do that, you’ll have to refinance, which means paying the interest you owe and deferring another month with even more interest charges.
3. You put your car in danger
Your car is collateral for a title loan, which means the lender can repossess and sell your vehicle if you default on payment. It’s a big risk. Cars tend to be one of most people’s most valuable assets, and they’re what you rely on to get you to work, the supermarket, and everywhere else you need to go.
4. They set you up for failure
Here’s the scenario that title lenders thrive on – you borrow money from them when you’re in trouble. Due to the short repayment term and ridiculous interest rate, you cannot pay in full. Instead, you have to refinance your loan, month after month, paying them more interest each time. If you’re lucky, you’ll eventually be able to pay in full. Otherwise, the lender will simply take your car.
It happens all the time. The Consumer Financial Protection Bureau (CFPB) investigated title loans in 2016. Here are some telling statistics:
- Only about 1 in 8 loans is repaid without refinancing.
- More than half of all title loans involve more than three loan sequences.
- About 1 in 5 title loans result in the borrower’s vehicle being repossessed.
5. There are much better options available
A title loan is often a last resort, but you may have more options than you think, even if you can’t qualify for most loans because of your credit. There is good alternatives to short-term loans that many consumers do not know. Here are a few things to consider:
You can also look into loan options with your bank or local credit union, or see if friends and family can help.
Due to the cost of title loans and the way they are set up, they can hurt you financially. This is one of the few loans that I would never recommend under any circumstances. Spend some time researching alternatives and you’ll likely find a much better and cheaper option.
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