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Auto title loans: risks and alternatives

Car title loans give you quick money – often between $ 100 and $ 10,000 – in exchange for your vehicle’s title as collateral. This is a type of secured, property-backed loan that the lender can take if you don’t pay.

These loans are expensive, with high fees and annual percentage rates often exceeding 260%. If you’re strapped for cash, you probably have better options, like requesting a advance on your salary or one alternative payday loan of a credit union.

How Car Title Loans Work

A potential borrower walks up to the lender with the car and its title. The lender assesses the value of the car and offers a loan based on a percentage of that amount. The average loan is $ 1,000, according to the Pew Charitable Trusts. Borrowers can walk away with the money in under an hour, but the lender keeps their title as collateral until the loan is paid off.

There are two types of auto title loans:

  • Single payment loans require borrowers to repay in one installment, usually 30 days later, and have an average APR of 300%.

  • Installment loans allow borrowers to make multiple payments, typically over three to six months, and have an average APR of 259%.

Typically, auto title lenders have fewer requirements for potential borrowers, such as not checking credit or requiring proof of income.

Nerdy tip: An installment loan can be a more affordable way to borrow money. These loans allow you to borrow the money all at once and then pay it back in fixed monthly installments over a period of months or years, instead of weeks. You will not need to post collateral and loan amounts tend to be higher while interest rates are generally lower. Lenders usually require a credit check to apply, but you can find installment loans for bad credit.

Why Car Title Loans Are Risky

Think of auto title loans as the bully brother of payday loans.

Although their interest rates are lower than those of payday loans, which can have APRs greater than 1000%, auto title loan interest rates are by no means low. The upper limit of “affordable” is generally considered an APR of 36%. The fees and cyclical borrowing associated with auto title loans make them even more expensive.

And if you can’t pay as agreed, you risk losing your vehicle. In fact, 20% of those who take out a short-term single-payment car title loan will have their cars taken back, according to a report by the Consumer Financial Protection Bureau.

Car title loans can also lead to a cycle of debt, the CFPB found. A large majority of single payment loan borrowers renew their auto title loans multiple times, incurring fees each time. Only 12% of single payment borrowers repay without renewing the loan, according to the CFPB. One-third of the remaining borrowers renewed their loans seven or more times. For a $ 1,000 loan, that would mean at least $ 1,750 in fees alone.

Does Paying Off a Title Loan Strengthen Your Credit?

In short, no: the lender does not report your payments to the credit bureaus, so paying off the loan does not create credit. If you don’t pay, the lender likely won’t send you to collection, which will hurt your credit – they may just repossess your car to pay off the debt.

Alternatives to car title loan

There are quick cash out options that cost you less – and are less risky – than a car title loan.

Before taking out an automobile title loan:

Continue with all other options: If nothing happens, speak with your creditor to see if you can have more time, develop a payment plan, or manage the short-term financial consequences of non-payment, such as late fees.

Compare the cost of taking out a loan versus not taking it: Calculate the overall cost of not having the funds for your goal, then compare that to the typical cost and interest cost of a car title loan.

If you are taking out a car title loan, cut the part in Your budget to pay it off as soon as you can. This will help you manage costs and minimize the risk of your car being repossessed.