Car Buying

A Field Guide to Car Title Loans

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author photo by Russ Heaps December 2014

Car title loans are the duct tape of financing for borrowers with poor credit needing a quick infusion of cash. If used at all, they should never be the fix for a long-term need.

Finding the cash to cover an unexpected expense can be tough for people living paycheck to paycheck. It's even more difficult when there is no paycheck or if that person has a poor credit history.

For those who, for whatever reason, can't borrow from a traditional lender, such as a bank, credit union or even a loan company, car title loans can be a quick-and-easy answer when a sudden need for cash arises. With some car-title-loan companies willing to lend up to $50,000 within minutes of completing a loan application without performing a credit check, such loans sound like a no-brainer, right? Wrong.

A car title loan should be a last-ditch measure only considered when there are no other options.

What Is It?

Car-title-loan companies lend cash with your signature and promise to repay the money using your car as collateral. In financing that's known as a secured loan, because something you own backs up your promise to pay. If you don't pay according to the loan-agreement terms, the lender can take that something to satisfy the balance owed -- in this case, your car.

Who Qualifies?

Virtually anyone owning a car that's worth more than any current outstanding loan balance on it can get a car title loan. The difference between what you owe on your car and what it's worth is equity. A car-title-loan company will lend you some portion of that equity in cash. Usually, the only other qualifier is that you must show proof of valid car insurance. Once a lender makes the loan, your car essentially belongs to that lender until the balance is paid in full. You can continue driving it, but the lender will expect you to protect your loan collateral with insurance. The lender may even demand that you increase the insurance amount.

What Are the Benefits?

The number one benefit is instant cash. Your credit history doesn't matter. In fact, these lenders don't even check credit reports because they don't really care about your ability to repay the loan. If you don't pay, they get your car. If you can't borrow the cash you need anywhere else, a car title loan can provide it instantly.

What Are the Pitfalls?

The number one pitfall is -- you guessed it -- you can lose your car. Usually a car title loan is short-term: 30 to 60 days. Many lenders will extend the terms if the borrower can't repay the balance under the loan's original terms, but the amount of the interest rate is often tied to the length of the loan. As a lender extends the terms, the interest rate (the fee a lender charges for the use of the money loaned) increases.

That brings us to the second major pitfall: interest rates. Because such loans are considered high risk, the initial interest rate can often be as much as 15 to 20 percent. If you take out a car title loan for $1,000 for 30 days at 20-percent interest, you will have to pay back $1,200. If you extend the original terms of the loan, that insurance rate will climb even higher. It's not unheard of for a borrower to pay two or three times the original loan amount in interest before finally paying the balance.

What It Means to You.

If you need cash right now, can't borrow anywhere else and are willing to roll the dice on losing your car, car title loans may be the answer -- but never make such a loan without a path for repaying it in 30 days.

This image is a stock photo and is not an exact representation of any vehicle offered for sale. Advertised vehicles of this model may have styling, trim levels, colors and optional equipment that differ from the stock photo.
A Field Guide to Car Title Loans - Autotrader