If you are strapped for cash and own your car for free, an auto title loan can seem like a good way to get cash quickly when you need it. But auto title loans are among the most expensive types of credit you can get, along with payday loans and pawn shops. All of these loans fall under the category of predatory loans: they target consumers who are in desperate need of money and therefore willing to pay ridiculously high prices to get it.
How securities lending works
Auto title loans use your car as collateral. Collateral is an asset used to secure a loan – in other words, it insures the lender against default. If the borrower does not repay the loan on time, the lender has the right to take any property listed as security for the loan. That’s right: if you don’t pay off your auto title loan, the lender can take your car. Some auto title lenders will even require you to install a GPS device in your car so that if they decide to repossess the vehicle, they can find you wherever you go.
The cost of auto title loans
Auto title lenders charge an average of 25% per month interest on the loan. That’s an annual percentage rate (APR) of 300%! Even credit cards charge only an average APR of 15.59%, and they are the most expensive of the traditional credit options. And you can expect an auto title loan to include a variety of fees in addition to exorbitant interest. In other words, if you were to take out a $ 1,000 auto title loan and pay it off 30 days later, you owe the lender $ 1,250, plus who knows how much.
Alternatives to securities lending
Most consumers have much better options than a car title loan, even if their credit rating is bad. If you need the money because you’re behind on your bills, contact your creditors and see if you can negotiate debt reduction or at least a longer repayment period. If you are really overwhelmed, a credit counseling service can help you make a debt repayment plan. Other options for getting money fast include a cash advance on a credit card (which will likely be very expensive, but not as bad as a car title loan), a loan from a friend, or a loan from a friend. a family member, or a small loan or line of credit from your local bank. Even borrowing money on your 401 (k) might be better than taking out an auto title loan.
Once you’ve gotten out of your current financial crisis, prioritize setting up a emergency savings fund to protect you from similar situations in the future.
Get a title loan
If you decide that you really have no choice but to get an auto title loan, shop around with the different title lenders to get the best deal possible. Carefully review the loan terms and decline any additional features such as roadside assistance. If the lender insists that you take such additions, find another lender. Learn about all of the different fees listed on the loan documentation (there will likely be several) and try to negotiate that these fees are waived or at least reduced. If you push the lender enough, they might be willing to bow to these costs a bit. Finally, avoid “rollover” offers. Securities lenders will often allow you to pay only the interest on your loan and defer the principal on a new loan, but this will trap you in a never-ending cycle of rising fees and interest.