Title Loans: Too Good to be True

a many holds one hundred dollar bills symbolizing a car title loan

A title loan is a type of short-term loan that allows a borrower to get quick cash by using a vehicle as collateral. The borrower surrenders his or her vehicle title when taking out the loan, and the lender has the right to take the borrower’s car if the borrower defaults on loan payments. Like most short-term loans, title loans are extremely expensive and present a variety of risks to the borrower.

The Greatest Risks of a Title Loan

Many borrowers fear losing their vehicles and potentially their jobs if they default on title loans. This is a real possibility, and the lender does have the right to take the vehicle. However, it is more likely that the lender will continue to apply interest and fees equaling a value far greater than that of the original loan or vehicle. This default will dramatically affect your credit score and ability to secure good, quality credit.

Interest rates are a big problem with title loans. These loans are immensely expensive because of how easy they are to obtain. The annual percentage rate of title loan interest is an average of about 300 percent and the standard repayment period is around 30 days. This short repayment period often catches borrowers off guard, and the terms aren’t always explained clearly. Unlike a credit card, for example, the loan begins accruing interest quickly, usually after the first day. Borrowers tend to think there are 30 full days to repay the loan without interest, and that is typically not the case.

The Debt Cycle

Most borrowers have unrealistic expectations of being able to pay off a title loan on time with little interest. The fact is that a title loan rarely changes a person’s financial fitness within the 30 day repayment period. The borrower may end up using other credit to pay off the loan, or the borrower may be forced to put common expenses on credit after repaying the loan. This use of credit for everyday expenses can create a long-term cycle of debt that often leads to bankruptcy. Lenders fully understand that some clients will be unable to pay off the loan, and while they technically should not issue a loan to a borrower who is clearly unfit, they often do so anyway. These lenders are typically not affiliated with a bank or large institution, so they have fewer regulatory checks on their lending practices.

If you are considering a title loan, then it is important to understand the inescapable costs of these loans and the possible long-term debt they can very quickly create. A borrower in a financially difficult position should explore every monetary option possible before taking a title loan, including other forms of credit, borrowing from friends and family, and selling assets. A title loan should always be a last resort.