Finance Globe

U.S. financial and economic topics from several finance writers.
4 minutes reading time (710 words)

Borrowing a Title Loan is Risky

If you’ve incurred unexpected financial emergency, but don’t have an emergency fund or sufficient credit to bail you out, you might be tempted to take out a title loan. Be careful, these loans are one of the most predatory types of loans on the market, even worse than the infamous payday loans.

A title loan is like a mix between a pawn and a payday loan. You can take out a loan using your vehicle as collateral. You keep your car for the length of the loan period, but the lender can take possession of your car if you fall behind on payments.

Because your vehicle is on the line, there’s typically no credit check for a title loan. You can qualify for the loan regardless of your credit history and sometimes with very little income documentation.

The amount you can borrow depends on the value of your car. The lender will let you borrow a certain amount of your vehicle’s worth, generally around 50% to 60%. Obviously, the more your car is worth, the larger the loan you can borrow. Your vehicle must be free of other liens, i.e. you can’t still have a car payment, before you can use it for a title loan.

While title loans may be easy to get, they’re not necessarily so easy to pay back because it requires you to part with several hundred or even thousands of dollars all at once. What are the odds that you’ll have an extra $1,000 this month to pay back a title loan?

Loan terms are short, often due in full within 30 days. You don’t have the option of making monthly payments to reduce the loan balance over time. However, you may be able to renew the loan if you can’t afford to pay the balance after 30 days, but you’ll have to pay at least a month of interest to rollover the loan. Interest is so high on title loans, you could pay several hundred dollars just to extend the loan another 30 days. Unfortunately, the money you pay to extend your loan doesn’t reduce the loan principle.

Late payments have dire consequences – your vehicle could be repossessed the day after you miss a payment, without a warning. When you take out the loan, the lender may make a copy of your key or even install a GPS system that allows them to turn your car off remotely. These methods make it easier for the title loan company to take possession of your car if you miss a payment.

Because they’re not subject to the same usury laws as credit card issuers and other lenders, title loan companies are able to charge higher interest rates. While the interest paid over a 30 day period may not seem so high, if you translate that interest to an annual percentage rate, the number is shocking. For example, a 30% monthly title loan rate really translates to a 360% APR, something absolutely unheard of with even the most expensive credit card. Still, many people accept interest rates this high because they have no other source of income.

Low-income borrowers may not qualify for loans through other sources, either because they don’t make enough money or because they don’t meet the credit requirements. Unfortunately, these borrowers are also more likely to get caught in a title loan trap. The loan term is so short, it’s extremely difficult to pay back the loan in one lump sum. The more you borrow, the harder it is to pay it off.

Ideally, you’ll never have to deal with a title loan. Build an emergency fund while you’re still financial stable so you can use it if you run into trouble.

If you have an unexpected expense that you can’t cover from savings or credit card, check to see if your bank or credit union has options. You may be able to take out a similar short-term loan at a much lower interest rate. Your employer may also have payday advance options you can take advantage of at no fee. Finally, check with friends and family members. It may be embarrassing, but they’re probably much better lenders than a company who’ll take your car if you’re one day late.

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Monday, 30 January 2023

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