They don't get the public outcry that payday loans receive (see Beware Of Payday Loans), but in the eyes of most consumer protection agencies, they're just as dangerous. A car title loan is simply a loan against the value of your car. How do they work and how much can you get?
Lenders love these loans because the collateral (your car) makes them as risk-free as a loan can be. The usual borrowers are people who need a short-term loan for more than their credit card can cover – and more than they could get from a payday loan, given what they earn.
A car title loan is one way to raise a larger sum of money quickly. All prospective borrowers have to do is sign over the free and clear (meaning they don't owe money on the car) title to their car and they get the loan – we'll cover how much later.
Another plus for people whose credit isn't stellar is that title loans don't require a credit check. The obvious reason for that: The borrowers might be high risk, but the lender has the title to their car. This gives borrowers every incentive to make repaying the loan a top priority. If someone doesn't pay, the lender sells the car and still makes a profit on the loan. Borrowers who do pay are hit with a triple-digit annualized interest rate, plus often other fees. Whatever happens with this loan, lenders get their money back, plus a profit.
How Much Can You Get?
The loan is based on the value of the car. Some lenders may use the Kelley Blue Book value while others have proprietary valuing metrics based on current auction prices.
Once the lender determines the correct value of the car, a borrower will probably be offered between 25% and 50% of its value. If the car is worth $3,000, expect $1,500 at most. If the loan goes into default, the lender repossesses the car, sells it at auction, and still makes money.
Along with the title, the lender may ask the owner to leave a copy of the key or even install GPS tracking on the vehicle.
Some States Cracking Down
This arrangement is what has consumer rights groups and regulators sounding the alarm. According to the Center for Responsible Lending, interest rates for this type of loan are 20 to 30 times the rate charged by credit card issuers. What's more, most car title loans are for 30 days and few people can pay off a loan that large in one month. Car title loans are rolled over an average of eight times. Result: Paying back a $500 loan over eight months will end up costing the borrower about $650 in interest in addition to the original $500.
Because of the predatory lending label placed on car title loans, fewer than 30 states allow them and only 16 allow lending at triple-digit annualized interest rates. Many cap the maximum principal at less than $1,000, with Montana capping the amount car owners can borrow at $300.
The Bottom Line
There is conflicting information on how many people are losing their cars as a result of car title loans. What is equally important how much these loans cost the borrower. Some could end up paying more than the value of their car if the loan continues to roll over before they finally pay it off.
If you live in a state that permits car title loans, exhaust every other option first. Even the highest interest rate on a subprime credit card will be exponentially cheaper than a car title loan and not risk you losing your car. See Getting A Car Title Loan and States That Allow Car Title Loans.
