If you’ve ever been looking for a way to get fast cash, you’ve probably seen an ad for a car title loan. These may initially seem like an enticing option because you only need a car in your name to get one. There’s no credit check, and you typically don’t even need to meet any income requirements.
Title loans can be dangerous, though. Before you sign on the dotted line, here are eight things you need to know about them.
Laws Vary by State
For the most part, each state regulates the title loan companies operating within its borders. This means the rules on a title loan could be very different depending on where you are. Some states have even outlawed title loans because of how risky they can be.
Interest Rates Are High
Many states that allow title loans haven’t put any cap on the amount of interest lenders can charge, leading to interest rates of 25 percent per month or more. That’s a massive amount, equating to an annual percentage rate (APR) of 300 percent. Even in states with interest rate limits on title loans, the limits still tend to be very high. In those with lower interest rate limits, such as Texas with its limit of 10 percent, lenders use loopholes to charge monthly fees instead.
Terms Are Short
Title loans are supposed to be short-term loans, and most of them are set up with terms of 30 days. Only a select few states require longer terms than this. You are usually able to keep your title loan longer by extending it, but this requires you to pay any interest and fees, and then the lender charges you another set of interest and fees for your new title loan term.
It’s Easy to Get Trapped in a Cycle of Debt
So, you have a type of loan that appeals primarily to low-income borrowers with no other options, plus there are high interest rates and short terms. This makes it very easy for borrowers to end up in a vicious cycle of revolving debt where they can only pay enough to extend their loan and never make any headway on paying down the loan principal. After a few extensions on a title loan, you may have paid several times the amount you borrowed just in interest.
Your Car Is the Collateral
When you get a title loan, you need to give the lender your car title. Although you still maintain possession of your car while you’re paying your loan off, it serves as the collateral for the lender to repossess if you default. In some states, lenders can even put a GPS tracker on your car to make repossession easier.
Repossession Can Happen Quickly
One out of every five title loan borrowers end up having their car repossessed, and depending on your state, this could happen as soon as you default. Some states require lenders to give you a grace period before repossession, but many have no such protections in place.
It’s Hard to Get Your Car Back After a Repossession
Theoretically, you can pay your lender what you owe to get your car back when it has been repossessed. The problem is that not only will you need to pay the full loan balance, but the lender can also tack on “reasonable” costs they’ve incurred, including the cost of repossessing your car and storing it. You’ll be looking at a big bill to get your car back.
You Could Get Another Bill After Your Car Is Sold
If you think the lender is done after they’ve sold your car, you may be wrong. In some states, if the proceeds from the sale of your car don’t cover the balance on what you owed the lender, they can send you another bill for that.
With all the risks of title loans, you should be very wary about getting one. Make sure you read all the fine print and don’t borrow a loan that you can’t pay back by the end of the term.