Title Loans Are Never a Good Option if You Need Quick Cash

If you get a title loan, you might as well just give your car away

Title Loan Companies Take Your Money And Your Car
Image: NCCC
October 2, 2018

Strapped for cash? Who isn't these days? Some lenders advertise short-term loans, called title loans, that use the collateral of your car. It's similar to a home equity loan, only a title loan can be much riskier and cost you a significant amount of interest charges. It can even cost you the car itself!

How Do Title Loans Work?

A title lender assesses a car's value and offers the owner a loan based upon a percentage of the assessed value, with the average loan being about $1,000. At this point you hand over your car's title in exchange for the short-term loan, which is often only thirty (30) days, most of the time without a credit check or proof of income. You are assessed an interest rate and are expected to pay off the loan at the end of the term. If you don't, the lender can take your car.

Interest Charges

It may seem sensible to do a short-term title loan, but it's not, even if the interest rate is 25%. The problem is that the interest rates quoted aren't often in terms of an Annual Percentage Rate (APR). That 25% interest for a 30-day single-payment loan is about 300% in the terms of the APR we're all used to. That's significantly less interest than a typical payday loan, which is often 1,000% APR, but still much higher than a typical a credit card! The three to six month installment loans require payments on a regular schedule and typically average about 260% APR, which isn't much better.

loan costs add up quickly

It's usually never just a one-time short-term title loan. The vast majority of consumers who use title loan services end up rolling over the loan at the end of the term, which means that the original loan and any unpaid interest charges become a new loan subject to the same high interest charges. In fact, the average consumer who uses title loan services will roll the loan over about eight times or more before paying it off whereas only 12% of single payment borrowers will pay off the loan at the end of the first term. Over time, the consumer can end up with an outstanding loan balance many thousands of dollars more than the original loan.

A Quick Cost example

Think about taking out a $2,000 title loan. At the end of the 30-day loan term, you'll owe $2,500. If you roll it over eight times, which is typical, you end up paying about $11,921 total, or nearly $10,000 in interest charges! These types of loans put consumers into an endless debt cycle, who often lose their cars and end up owing thousands. In fact, about 20% of consumers who take out title loans lose their cars.

Some title lenders have been shady

Apart from their absurd interest charges, there have been cases of title lenders doing illegal things in order to get your car, even if you have intentions of paying off the loan. Some companies might find a vehicle particularly appealing, particularly if it would bring in a lot of money if they sell it.

Lenders have been known to do such things as not crediting properly-received payments, refusing to accept payments in cash, providing a non-existing address for payments, or changing payment locations without advising customers. Title lenders have been known to reposes a vehicle in as little as an hour after a payment deadline has passed.

Any Alternative to title loans is better

Of course, the best course of action is to avoid taking title loans in the first place. If you must secure a loan, consider alternative methods, such as your local credit union.

  • Ask friends and family for any help.
  • Seek out organizations who offer financial assistance.
  • Consider your local credit union.
  • Get a paycheck advance.
  • Get a part-time temporary job.
  • Consider a pawnshop secured loan.
  • Use your credit card.