A title loan or a car title loan is a short-term loan secured by the title of your car. Title loans are only legal in certain states, check your state’s laws before considering a title loan.
What is a title loan?
With a title loan, the borrower gives the lender the title of his car as collateral for the loan. Loans are generally for a short period of time, 30 days is common. Interest rates are generally quite high.
According to the Federal Trade Commission, consumers should be very careful before taking out a title loan. First of all, it is important to realize that the lender is taking the title of your car as collateral. If you don’t pay back the loan, you will lose your car. The lender will sell the car to get back the money they loaned you.
Second, the interest rates of these loans are quite high. The FTC quotes interest rates as high as 25% per month. Often there are additional costs to the loans which can raise the interest rates even higher.
How does a title loan work?
Title loans are often compared to payday loans. These loans generally do not require a credit check and can seem like an easy way to get cash in the short term. Title loans are for low income borrowers with poor credit who are unlikely to qualify for more conventional loans at lower interest rates.
To get started, you will need to own your car free and cleared in most cases. Once you are approved for the loan, you relinquish your title to the lender.
You can usually continue to drive your car while the loan is in progress, but some lenders attach a GPS device to the car and / or take copies of the keys. This makes it easier to repossess the car if you don’t pay off the loan. They can even install a device that can prevent you from starting the car if your payment is overdue, or just to remind you to make your payment. In the latter case, the lender will send you a code that will allow you to start the car.
Loans are usually given for periods as short as 15 to 30 days, but can be as long as a year in some cases.
What are the risks of securities lending?
Some experts have compared title loans to predatory loans. Predatory loans generally involve loans to low-income Americans who have few alternatives to fill a cash flow gap. These loans often have very high interest rates which make them difficult or even impossible to repay for many borrowers.
The need for money may be for a medical emergency, to pay rent, or just to make ends meet.
Securities lending involves a lot of risk. High interest rates can quickly multiply the amount that needs to be repaid to two, three or more times the actual amount borrowed. This can make it difficult or impossible for the borrowers to repay the loan. They may need to take out another high interest loan to pay off the title loan to avoid losing their car. Many title lenders offer initial loan renewals which only serve to make an expensive loan more expensive. This buries these borrowers in a deeper debt hole and perpetuates a cycle of debt for people who can hardly afford it.
If the borrower ultimately cannot repay the title loan, he will lose his car. The consequences of losing their car can include being unable to get to work, causing them to lose their main source of income.
Alternatives to securities lending
Depending on your situation, there are a number of alternatives to a title loan, including:
- Talk to your creditors. They may be willing to extend your repayment or even renegotiate the terms of your loan. Either is probably a better and cheaper option compared to a title loan.
- Use a credit card. The interest rate is probably lower than that of a title loan, and you won’t need to use your car as collateral.
- Compare the prices for other cheaper and less risky sources of credit.
- Work with a credit counseling service.
- Apply for an unsecured personal loan. If you qualify, no collateral is needed and the cost will likely be a bit lower.
- Use your tax refund, if one is owed to you, to pay off high cost debt or as an emergency fund.
- Borrow money from family or friends if possible.
Securities lending are widely advertised on television and elsewhere. Although they may seem tempting to those with short-term cash flow needs, these loans can be expensive and dangerous. Statistics vary, but according to some figures, up to 20% of title loans end with the loss of their vehicle by the owner.