Car title loans, also known as pink slip loans, allow consumers to borrow money based on the value of their vehicle. However, borrowers should carefully weigh their options before taking out this type of loan because it can come with significant risks.
Those risks include high-interest rates and the potential to lose your vehicle to repossession. To help you avoid these pitfalls, read on to learn more about how title loans work.
What Is a Car Title Loan?
A car title loan is a short-term secured loan that lets you use your vehicle’s value as collateral. You’ll typically hand over the hard copy of your car’s title to the lender to borrow the amount you need. You can usually get a loan of up to 50% of your car’s value in this way. When you pay back the loan, the lien is removed, and your car title is returned to you. However, if you fail to make payments, the lender may repossess your vehicle and sell it to recoup their losses. The Consumer Financial Protection Bureau (CFPB) warns that a large percentage of car title loans end up putting borrowers in debt they can’t repay.
A big part of the problem is that a title loan is considered an open-end credit product, meaning lenders don’t have to check your income or do a full credit check before offering you the money. And while some states limit how much lenders can charge, many don’t. As a result, borrowers can find themselves paying hefty interest rates — on par with payday loans — that add up quickly.
Getting a car title loan is fairly quick and easy. You’ll need to supply a loan application, photo ID and proof of income, your vehicle, your vehicle’s title, and sometimes a set of keys (not all lenders allow you to keep the keys). The lender will evaluate your car and determine how much you can borrow. Then you’ll sign a contract with the lender. Depending on your state’s laws and the lender, the loan term can last up to 30 days. During this time, you’ll need to make monthly payments plus additional fees such as processing, document, and loan origination charges.
If you’re having trouble making the payments, your lender can renew your loan. However, this comes with added fees and interest and puts you in a dangerous cycle of debt. Instead, look for less risky ways to borrow money, like personal loans from your bank or credit union, cash advances, or even credit cards. These options aren’t just safer, but they can also be a lot cheaper.
How Much Can I Get?
Typically, lenders offer up to 50 percent of your car’s value for a short-term loan. Lenders examine your vehicle to determine its value and then subtract any liens against it and other factors to come up with the amount of money you can borrow. Many lenders offer a quick approval process, and borrowers often receive funds within minutes of their application.
While quick access to cash is enticing, it’s important for potential borrowers to weigh all of the costs and risks associated with this type of lending. One significant drawback is that you’ll lose your car if you fail to repay the loan in time. In fact, according to the Consumer Financial Protection Bureau, 20 percent of those who take out title loans have their cars seized.
Another major concern is the high-interest rates. Depending on the lender and state regulations, you may pay an annual percentage rate (APR) of 36% or more on a title loan. This is much higher than the APR on a credit card, which is typically only 12 percent.
Aside from the hefty interest rate, title lenders charge additional fees to cover the cost of their services. These include processing, document, and loan origination fees, which can add up quickly. Adding these fees to the astronomical APR will make it even more expensive to pay back the loan.
Because of these high costs, it’s important for borrowers to consider other options for getting fast cash before taking out a title loan. These alternative options can include payday alternative loans from a credit union or online lender, personal loans, checking account overdrafts, and even using a credit card.
Taking out a title loan is also a poor option for people who already struggle with debt, as the short-term and high costs can turn it into a debt trap. The CFPB reports that more than half of people who take out auto title loans end up continuing to renew their loans, piling on additional debt each time, in order to avoid losing their vehicle.
What Are the Fees?
A title loan uses your car as collateral, which means that you can borrow more money than you would with a payday loan or an unsecured personal loan. However, title loans often come with steep fees that can add up quickly. Some states restrict how much you can borrow, and lenders often base the amount you can borrow on your vehicle’s value. To determine the value of your car, lenders typically use a system like Kelley Blue Book or NADA.
You’ll also likely be charged a monthly finance fee and an administrative fee. Together, these fees can add up to an APR of 300 percent or higher. This makes a car title loan one of the most expensive types of credit available. If you can’t repay your loan on time, the lender may allow you to roll it over into a new one, which can cost even more than the original loan. In addition, some lenders place a GPS device in your vehicle or install a “kill switch” to prevent you from starting your car if you don’t repay the loan.
If you’re looking for an alternative to a car title loan, consider asking family or friends for help, working on a side gig through a ridesharing app, or applying for a credit card that’s designed for people with bad credit. Some of these cards have a higher interest rate, but they’re generally cheaper than a car title loan in terms of total costs. You may also want to talk with a credit counselor to learn more about managing debt and creating a budget.
A car title loan is a risky way to get quick cash, especially when you’re already in a tight financial spot. It can lead to a cycle of borrowing that can end in losing your transportation and your credit. In addition, if you don’t repay your loan on time, you could face repossession. In fact, a study by the Consumer Financial Protection Bureau found that more than two-thirds of auto title loan borrowers take out seven or more loans in a row, and 20% have their cars repossessed for nonpayment.
How Long Will I Have to Pay Back the Loan?
To avoid paying more interest than necessary, try to pay off the loan as quickly as possible. If you can’t afford your monthly payments, try to negotiate with the lender for more time or a lower interest rate. Be sure to show the lender all your income sources, including contract work, side jobs, benefits, and retirement income. Some lenders also allow you to use gift cards and other cash rewards as part of your monthly income.
You should also check the lender’s interest rates regularly because they change often. You can compare rates offered by different lenders with the title loan calculator. Just be aware that some lenders quote their rates as annual percentage rates (APR), while others quote them as monthly percentage rates (MIR). Make sure you convert the rates to the same format to get an accurate comparison.
One of the biggest downsides to car title loans is that if you can’t make your payments, you risk losing your vehicle. The Consumer Financial Protection Bureau reports that more than 20 percent of people who take out title loans have their vehicles repossessed.
Another serious downside is the potential for a debt trap, whereby you continually take out new loans to cover the cost of the previous ones. The result is a vicious cycle of debt that can last for months or even years.
To help you avoid a debt trap, create a budget that includes your monthly payments and other expenses. It’s also important to prioritize your expenses and stick to a savings plan. Then, you can build up your emergency fund and reduce the need to take out costly loan options like title loans.