Car title loans: Risks and Alternatives


In exchange for your vehicle’s Title as collateral, car title loans allow you to get cash quickly – usually between $ 100 and $10,000. The lender can accept this type of secured, collateral-backed loan if you don’t pay.

These loans are costly due to the high fees and high annual percentage rates. If cash is tight, there are other options. You can request an advance on your paycheck or a payday loan through a credit union from a instant title loan.

How Car Title Loans Work

A potential borrower approaches the lender carrying the car and its title. The lender will assess the car’s worth and offer a loan based upon a percentage. According to Pew Charitable Trusts the average loan is $ 1000. Borrowers are able to walk away with the money within an hour. The lender, however, keeps their title as collateral until the loan is fully paid.

There are two types auto title loans.

  • Borrowers are required to repay single installment loans within one installment. This is typically 30 days later. The average APR for these loans is 300%.
  • Installment loans allow borrowers the ability to make multiple payments. These typically take place over three to six month periods and have an APR of 259%.

Auto title lenders generally have less requirements for potential borrowers. They don’t require proof of income or credit checks.

An installment loan may be a better option to borrow money. These loans allow you borrow money in one lump sum and then repay it over a set number of monthly installments. The loan amounts are usually higher than the interest rates, but you don’t have to put up collateral. You can get installment loans for poor credit, although lenders may require that you have a clean credit history to be approved.

Why car title loans can be risky

Car title loans can be thought of as the bully sibling to payday loans.

Auto title loans interest rates are not as low as payday loans. However, they have interest rates that are much lower than auto title loans. The APR at 36% is the limit of affordability. These loans are even more expensive because of the high fees and the cyclical borrowing that they require.

You could lose your car if you fail to pay the agreed amount. According to the Consumer Financial Protection Bureau report, 20% of car-title loans with a short term will be repaid.

According to the CFPB, car title loans can also lead you into a cycle of debt. The majority of single payment loan borrowers have to renew their auto-title loans multiple times. This can lead to fees. According to the CFPB only 12% repay their single payment loan without renewing it. The CFPB found that one third of the remaining borrowers renewed their loans seven times or more. That would translate into at least $ 1,750 of fees for a loan of $ 1,000.

Can paying off a title loan strengthen your credit?

No. The lender does not report your payments on credit bureaus. Therefore, paying off the loan doesn’t create credit. You won’t be sent to collection if the lender doesn’t collect your payments. That will damage your credit. Instead, they might repossess the car to pay the debt.

Alternatives to a Car Title Loan

Quick cash out options are available that are much cheaper than car title loans and have a lower risk.

Before getting a car title loan

Continue to explore all options. Talk with your creditor if nothing happens. They can help you get more time, set up a payment schedule, or deal with the short-term financial consequences such as late fees.

Compare the cost to take out a loan with not taking it. First, calculate the total cost of not having enough funds to accomplish your goal. Next, compare it with the car title loan’s typical cost and interest costs.

You should reduce the amount of the car title loan you are applying for to your budget in order to have it refunded as soon possible. This will help to reduce costs and decrease the possibility of your car being reposed.


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