Strapped for cash? Even financially stable families may sometimes find themselves in a situation where they need cash fast. Unforeseen events can strip a person's savings or continued financial difficulties may cause a family to look for any means of finding a short-term loan.
You've probably heard of payday loans – the loan that has caught the attention of federal and state lawmakers in recent years (see Beware of Payday Loans) – but that's not your only option.
Car title loans are similar to payday loans except that you have to pledge your car as collateral. It's not just a pledge on paper. You actually give the lender your car title. Some may even ask for a second set of keys. If you don't pay, the lender will take your car and sell it to pay back the loan.
How a Car Title Loan Works
You can get a car title loan either online or from a local lender. Complete the application, supply the required documentation – including a car title without any liens against it – sign the paperwork and the loan is yours. In most cases the lender won't perform a credit check.
While it may be easy to get a car title loan, think hard before you ask for one: For starters, look at the interest rate. Some states limit the interest rate of car title loans to 30% per year, but others may allow lenders to charge rates of 25% or more per month. This equates to an APR, the interest rate expressed in an annual rate, of more than 300%. Along with interest charges, the lender may tack on additional fees. According to the Center for Responsible Lending, loan rates are often 20 to 30 times higher than credit card rates.
Car title loans are short-term – often 30 days. If you can't repay the loan, it will probably be rolled over. The average car title loan will be rolled over eight times. If you hold the car title loan for one year at a 300% APR, you will pay about $1,111 on a $500 loan not accounting for fees.
Not All States Allow Car Title Lending
Fewer than 30 states allow car title lending, but 16 allow for lending at triple-digit APRs. Some lenders make loans in certain states due to loopholes in the law while others change the terms of the loan to fit state law. Before looking for a title loan, either online or at a physical location, learn the laws of your state. Look at this graphic to see if your state allows car title loans.
Before You Take Out a Car Title Loan
First, exhaust every other possible of short-term cash. You are risking your car – for high interest rates and fees – to get a loan worth far less than your car. One study showed that 60% of New Mexico car-title borrowers had their car repossessed as a result in the year the data were gathered.
Second, read everything in detail. Know the interest rate, the fees, repayment and rollover policies, and the laws in your state governing car title loans
Finally, don't borrow more than you're sure you can pay back in 30 days. Don't allow the loan to roll over.
The Bottom Line
Before getting a car title loan, consider any other way of raising money first. Consumer.gov advises checking with your bank or credit union for a short-term loan, negotiating with your creditors, borrowing from family members, or using money saved for other purposes.
The terms of car title loans are such that you should consider one a last resort.
