I’m 32 and need cash to pay this month’s rent, but I’ve maxed out my credit cards and already owe $15K to family and friends. I’m considering getting a car title loan — is it worth the risk?
With payday loans off the table due to their notorious high-interest rates, you may find yourself considering a car title loan as a last resort during a financial emergency.
But is this option truly safe, or could it plunge you deeper into debt?
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Though recent data is difficult to find, a 2015 report from The Pew Charitable Trusts found more than 2 million Americans use auto title loans annually.
The loans are so notorious that they’ve either been outlawed or had their interest rates capped in some states after regulators raised concerns about predatory lending.
What is a car title loan?
A car title loan is a short-term, high-interest loan that uses your vehicle’s title as collateral. The process is simple: You hand over the title to your car, and in exchange, you get a loan based on a percentage of your vehicle’s value – typically between 25% and 50%. The lender holds your title until the loan is fully repaid. The loan term is usually 15-30 days, but some lenders offer longer terms. They usually also only offer loans on vehicles below a certain age.
Car title loans appeal to younger borrowers because they’re fast and accessible. Unlike traditional loans, which require good credit and a lengthy approval process, car title loans are available to borrowers with poor credit or limited credit history. The catch? The interest rates are sky-high, often around 300% APR, and failing to repay the loan could result in the loss of your vehicle, along with lasting damage to your credit.
For example, let’s say you borrow $1,000 against your car title. If the loan carries a not-uncommon 25% monthly interest rate, you’ll owe $1,250 at the end of the 30-day term. If you can’t pay that, you might roll over the loan, which means you’ll owe $1,562.50 the following month. The debt quickly escalates.
Repercussions of late or missed payments
The biggest risk: If you fail to make the payments, the lender can repossess your car. The Center for Responsible Lending says that happens to 20% of car title loan borrowers – a devastating blow to the borrower, especially if the car is their primary means of transportation for work or family obligations.
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Even if you manage to keep up with payments, the high interest can lead to a debt cycle that’s tough to escape. Many borrowers find themselves renewing their loans multiple times, adding more fees and interest and enlarging the total payout to the lender. The typical car title loan is refinanced eight times and these loans drain more than $700 million in fees annually from people in 17 states, according to the Center of Responsible Lending's 2013 report.
Is it worth the risk?
In your scenario, with $15,000 in debt and maxed-out credit cards, adding a high-interest loan into the mix could exacerbate the challenge. While the immediate need for cash is understandable, the risk of losing one’s car or becoming trapped in a cycle of debt may outweigh the benefits.
Before resorting to a car title loan, it’s worth exploring safer alternatives:
Negotiate with your landlord
If your financial issues are temporary, explain your situation to your landlord. They may be willing to offer a short-term payment plan or delay rent collection.
Local assistance programs
Many communities offer emergency assistance programs for rent, utilities, and other essential expenses. Contact local nonprofits or government agencies to see if you qualify for help.
Personal loan from a credit union
If you have decent credit, a personal loan from a credit union typically offers lower interest rates than car title loans. Some credit unions also offer small-dollar loans designed for emergencies. "Many credit unions that have automated the process no longer use a credit report and instead determine eligibility based on factors such as whether the member has an account history and makes regular deposits," according to The Pew Charitable Trusts.
Peer-to-peer lending
Platforms like LendingClub or Prosper allow you to borrow from individuals rather than traditional banks. While interest rates vary, they’re often lower than payday or car title loans.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
