If you're strapped for cash and you own your car free and clear, an auto title loan might seem like a good way to get some fast cash when you need it. But auto title loans are among the most expensive kinds of credit you can get, along with payday loans and pawnshops. All of these loans fall into the category of predatory lending: They target consumers who are desperate for cash and therefore willing to pay ridiculously high prices to get it.
How title loans work
Auto title loans use your car as collateral. Collateral is property that's used to secure a loan -- in other words, it insures the lender against a loan default. If the borrower fails to repay the loan on time, the lender has the right to take whatever property is listed as collateral for the loan. That's right: If you don't repay your auto title loan, the lender can take your car. Some auto title lenders will even require you to install a GPS device in your car so that if they decide to repossess the vehicle, they can find you wherever you go.
The cost of auto title loans
Auto title loan lenders charge an average of 25% per month in interest on the loan. That's an annual percentage rate (APR) of 300%! Even credit cards only charge an average APR of 15.59%, and they're the most expensive of the traditional credit options. And you can expect an auto title loan to include a variety of fees on top of the exorbitant interest. In other words, if you were to take out a $1,000 auto title loan and repay it 30 days later, you'd owe the lender $1,250, plus who knows how much in fees.
Alternatives to title loans
Most consumers have much better options than an auto title loan, even if their credit score is poor. If you need money because you're behind on your bill payments, contact your creditors and see if you can negotiate a reduction in debt or at least a longer repayment period. If you're really in over your head, a credit counseling service can help you set up a debt repayment plan. Other options for quick cash include a cash advance on a credit card (which is likely to be very expensive, but not as bad as an auto title loan), a loan from a friend or family member, or a small loan or line of credit from your local bank. Even borrowing money from your 401(k) could be better than taking out an auto title loan.
Once you dig yourself out of your current financial crisis, prioritize setting up an emergency savings fund to protect you from similar situations in the future.
Getting a title loan
If you decide that you truly have no other option but to get an auto title loan, shop around with different title lenders to get the best deal you can. Review the loan terms carefully and decline any "add-on" features such as roadside assistance. If the lender insists that you take such add-ons, find a different lender. Ask about all the different fees listed on the loan documentation (there will likely be several) and try to negotiate to get those fees removed or at least reduced. If you push the lender hard enough, they may be willing to bend a little on these costs. Finally, steer clear of "rollover" offers. Title lenders will often allow you to pay just the interest on your loan and roll over the principal to a new loan, but doing so will trap you in an endless cycle of escalating fees and interest.