If you need a loan right now, you’ve probably come across lenders who provide title loans. On the surface, they appear to be useful. Fill out a loan application, provide your car title as security, and you might have cash in your hands in less than an hour. Even if you have a poor credit score, you will almost certainly get accepted.
Unfortunately, title lenders are exploitative, and most borrowers regret taking out a title loan. Here are some reasons why you should avoid title loans at all costs.
They charge exorbitant interest rates
It is impossible to overestimate the cost of title loans. They have an APR of 300% on average, and no, that is not a mistake. Although these are supposed to be short-term loans, the interest rate is still 25% every month. For comparison, the finest personal loans have APRs that are far below 10%.
With a 300% APR, a $1,000 title loan would cost you $250 in interest after only one month. You may obtain quick cash, but it will come at a cost. Title loans are prohibited in 29 states, owing in part to their exorbitant interest rates.
They have reasonable payback conditions
A title loan typically has a payback duration of two weeks to one month. On the one hand, given how much it charges, this isn’t the kind of debt you’d want to hold for very long. However, this makes it difficult to repay your loan on time.
A month or less is just not enough time to improve your financial status and repay the money you borrowed, plus interest. If you can’t, you’ll have to refinance, which means paying the interest and adding another month with even higher interest charges.
You endanger your car
A title loan uses your automobile as collateral, which means the lender may repossess and sell it if you default. That is a significant danger. Cars are one of the most precious possessions most people own, and you rely on them to travel to work, the store, and wherever else you need to go.
They set you up for failure
Title lenders thrive on the following scenario: you borrow money from them when you’re in a bind. You cannot pay in full due to the short payback time and the exorbitant interest rate. Instead, you must renegotiate your debt on a monthly basis, paying them extra interest each time. If you’re lucky, you’ll be able to pay in full at some point. Otherwise, the lender will just repossess your vehicle.
This occurs frequently. In 2016, the Consumer Financial Protection Bureau (CFPB) examined title loans. Here are some eye-opening statistics:
- Only around one out of every eight debts is paid off without refinancing.
- More than half of all title loans have several loan sequences.
- Approximately one in every five title loans results in the seizure of the borrower’s car.
There are many superior alternatives accessible
A title loan is sometimes used as a last choice, but you may have more options than you believe, even if you are unable to qualify for most loans due to your credit. Many people are unaware of several excellent alternatives to short-term loans.
Discover: 6 ways to Compare bad credit personal loans
You might also check into lending alternatives through your bank or a local credit union, or ask friends and relatives for assistance.
Because of how much title loans cost and how they are structured, they can inflict significant financial harm. They’re one of the few loans I’d never endorse in any situation. Spend some time researching alternatives, and you’ll almost certainly discover a far superior, less expensive solution.