If you fall behind on bills or are faced with an emergency expense, it can be tempting to accept any financial relief you can find. But if you’re considering applying for a car title loan, it’s important to learn more about the potential risks of this loan option.
How do title loans work?
A car title loan is a way to get cash fast to pay for emergencies. To get a car title loan, you need to own your car outright or have equity in it. In exchange for the loan, you give the lender the title to your car until the loan is paid in full.1
Much like a payday loan, this type of loan is for a short period of time, usually 30 days, and you can receive your money fairly fast.
For some, a car title loan could be an attractive option for fast money in a pinch — especially if you’ve had trouble getting a loan from a traditional lender like a bank. But the Federal Trade Commission (FTC) advises consumers to think twice and consider other options before pursuing a car title loan.2
How it works
Those who want to borrow must complete a loan application, which typically involves high loan processing fees. You’ll need to present your car, car title, identification and other documentation to complete the transaction. Often, a credit check is not required.
Also known as a pink-slip loan, fast auto loan or title pawn, a car title loan is an expensive form of credit — lenders often charge an average annual percentage rate (APR) of about 300%. The FTC gives this example: If you borrow $500 for 30 days, you would have to pay on average $125, plus the original $500 loan amount for a total of $625 (plus additional fees).3
Are car title loans worth it?
Consider these key findings from a study conducted by The Pew Charitable Trusts to determine for yourself whether car title loans are worth it:4
- Car title loan customers spend about $1,200 in fees each year for loans that average $1,000.
- On average, title loan payments consume 50% of a typical borrower’s gross monthly income.
- Between 6% and 11% of title loan borrowers have a car repossessed annually — and one-third do not have another working vehicle in their households.
Three alternatives to title loans
Before turning to a car title loan to get the cash you need, explore these potential options:
Your emergency savings. The Pew Charitable Trusts found that 25% of title loan borrowers used their loans to pay for unexpected expenses.5 So if you’ve been saving for a rainy day, and are considering a car title loan to pay for an emergency expense, now may be the time to tap into those funds.
A personal loan. Personal loans come with lower interest rates, longer repayment terms and more affordable payments than title loans. And in some cases, you can get your funds as soon as the same day. This type of installment loan also gives you a clear payment schedule, so you’ll know exactly when your loan will be paid off.
Credit cards. Credit cards could offer a lower APR than a car title loan and a longer time to repay it. If your credit cards are already at their limit, you could ask for a credit limit increase. While this is not the most ideal solution, it may still be a better option considering the cost and potential risks of a car title loan.
Make the choice that’s best for you
When faced with a financial emergency, and limited options for handling it, be sure to explore all alternatives carefully. The key is choosing the option that helps you out of your situation, instead of making things worse.
1 https://www.creditkarma.com/personal-loans/i/how-do-title-loans-work/ 2 https://www.consumer.ftc.gov/articles/0514-car-title-loans 3 Ibid. 4 https://www.pewtrusts.org/en/research-and-analysis/reports/2015/03/auto-title-loans 5 Ibid.
