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Car Title Loans: Risks and Alternatives

Car title loans give you quick cash – often between $100 and $10,000 – in exchange for your vehicle’s title as collateral. This is a type of secured, asset-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 short on cash, you probably have better options, like asking for a advance on your salary or one alternative payday loan of a credit union.

How car title loans work

A potential borrower approaches 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 less than an hour, but the lender keeps their title as collateral until the loan is paid off.

There are two types of car title loans:

  • One-time 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, car 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 won’t need to provide 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 car title loans as the bully sibling of payday loans.

Although their interest rates are lower than those of payday loans, which can have annual interest rates in excess of 1,000%, car title loan interest rates are by no means low. The upper limit of “affordable” is generally considered to be 36% APR. The fees and cyclical borrowing associated with car 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, one-time payment car title loan will see their cars repossessedaccording to a Consumer Financial Protection Bureau report.

Car title loans can also lead to a cycle of debt, the CFPB found. A large majority of one-time payment loan borrowers renew their car title loans multiple times, incurring fees each time. Only 12% of single repayment borrowers repay without renewing the loan, according to the CFPB. A third of the remaining borrowers renewed their loan 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 the loan does not create credit. If you don’t pay, the lender probably won’t send you to collections, which will hurt your credit — they may just repossess your car to pay off the debt.

Car Title Loan Alternatives

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

Before taking out a car title loan:

Pursue all other options: If nothing happens, talk to your creditor to see if you can get more timedevelop a payment plan or deal with the short-term financial consequences of non-payment, such as late fees.

Compare the cost of taking the loan to not taking it: Calculate the overall cost of not having the funds for your goal, then weigh it against the typical cost of fees and interest for a car title loan.

If you are taking out a car title loan, cut out the room in your budget to repay it as soon as possible. This will help you manage costs and minimize the risk of repossession of your car.