You might want to steer away from car title loans
Your car can be lost for missing one payment
If you need to raise a few thousand dollars and you can’t get a regular bank loan, you might be tempted to apply for a car title loan. Your vehicle is put up as collateral, and then you repay the money over a few months. No credit checks are done, and you aren’t required to give banking information. Sounds good, right? Er, no… It might be easy to get an auto title loan, but you need to know it’s a very risky way to borrow.
Interest rates can be astronomical
In some states, interest on consumer financing products such as auto title loans is capped at 30-36 percent a year. However, lenders will compensate by charging steep fees if you are late in payment, and for issuing loan documents and verifying no outstanding loans or liens on the vehicle.
Elsewhere, APRs (annualized percentage rates) on title loans are often 300 percent or more. For example, in Illinois, rates are unregulated and can be as high as 700 percent a year. The interest rates can be manageable, just like with payday loans, if you’re able to pay the loan off within a month or two. However, because car title loans are often worth several thousand dollars, many borrowers find themselves extending their loans many times, and getting deeper and deeper into debt as interest charges pile up.
Be aware of scams
Car title loans are illegal in several states, but there you might be offered a “motor vehicle line of credit” or “sale and leaseback” deal instead. Though they’re similar to car title loans, as they are not permitted you don’t have legal recourse if the lender decides to seize your vehicle even if you have made payments when due.
It is illegal for a title loan issuer in the US to charge a fee for repossessing a car, but some will still demand payment. Some borrowers have had to pay for cleaning in addition to hourly rates for someone to pick up their cars, and mileage and towing fees.
“Pay on time or we’ll take your wheels”
When you pawn your jewelry to raise some cash, you know you have to go back and make regular payments or the pawn shop will confiscate your valuables and sell them. A car title lender can do the same thing with your vehicle. In other words, if you miss just one payment of maybe a couple of hundred dollars, you could lose a vehicle that’s worth many thousands, and you’ll have no way of getting around. That’s a pretty big risk to take.
Some lenders will sue you instead, which means you don’t have to give up the car – as long as you can pay the entire amount you owe them, plus court costs and other legal fees – and of course that can be a challenge when you’re strapped for cash. Before signing car title loan paperwork, check the fine print for details on penalties for late or non-payment. Can the loan company seize the car if your payment is just a day late? Will they hike your interest rate instead? Can they track you with GPS and disable the engine remotely if they aren’t paid yet?
Try to find the money somewhere else
The risk of losing your car to a title lender is so high that, for most people, it’s worth making the effort to borrow from a different source. You could try a payday loan instead, which does not require your car as collateral. You could be eligible for a credit union loan or government assistance. How about having a garage sale or selling some things on eBay?
It’s hard to live without a car, and you might not want to risk yours due to not being able to handle title loan payments.
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