5 Reasons to Stay Far, Far Away From Title Loans

Don't be fooled by promises of fast cash. This is one of the most dangerous types of loans you can get.

If you need a loan ASAP, there's a good chance you've come across lenders offering title loans. On the surface, they look convenient. Fill out a loan application, hand over your car title as collateral, and you could have the cash in under an hour. Even if you have a low credit score, you'll most likely still get approved.

Unfortunately, title lenders are predatory, and a title loan is a decision most borrowers come to regret. Here's why you should avoid title loans at all costs.

1. They have extremely high interest rates

There's no overstating how expensive title loans are. They have an average APR of 300%, and no, that's not a typo. Now, these are intended to be short-term loans, but that still works out to an interest rate of 25% per month. For comparison's sake, the best personal loans offer APRs of well below 10%.

At a 300% APR, if you get a $1,000 title loan, it would cost you $250 in interest after just one month. You may be getting fast cash, but it's going to cost you. In part because of these high interest rates, title loans are banned in 29 states.

2. They have short repayment terms

The standard repayment term on a title loan is between two weeks and a month. On the one hand, this isn't the type of loan you'd want to have for too long, considering how much it costs. But this also makes it hard to pay back your loan on time.

A month or less just isn't a lot of time to improve your financial situation and come up with all the money you borrowed, plus interest. If you can't do it, you'll need to refinance, which means paying the interest you owe and tacking on another month with even more interest charges.

3. You're putting your car at risk

Your car is the collateral on a title loan, which means the lender can repossess and sell your vehicle if you default. That's a big risk. Cars tend to be one of the most valuable assets most people have, and they're something you rely on to get to work, the supermarket, and everywhere else you need to go.

4.​​ They set you up to fail

Here's the scenario title lenders thrive on -- you borrow money from them when you're in a jam. Because of the short repayment term and the ridiculous interest rate, you can't pay in full. Instead, you need to refinance your loan, month after month, paying them more interest each time. If you're lucky, you'll eventually be able to pay in full. Otherwise, the lender will just take your car.

This happens all the time. The Consumer Financial Protection Bureau (CFPB) investigated title loans in 2016. Here are a few telling statistics:

• Only about 1 in 8 loans are paid back without refinancing.
• More than half of all title loans are for more than three loan sequences.
• About 1 in 5 title loans result in the repossession of the borrower's vehicle.

5. There are much better options available

A title loan is often a last resort, but you may have more options than you realize, even if you can't qualify for most loans because of your credit. There are some good alternatives to short-term loans that a lot of consumers don't know about. Here are a few avenues to consider:

• Many lenders offer personal loans for bad credit.
• Payday advance apps let you get a free cash advance with no credit check.
• A secured loan is a loan you get using collateral, such as your car. This is the same type of loan as a title loan, but there are lenders that offer them with much more reasonable interest rates.
• If you have any credit cards, you could use them to cover expenses. Although most have high interest rates, they're still far cheaper than title loans.

You could also look into loan options with your bank or a local credit union, or see if any friends and family can help you.

Because of how much title loans cost and the way they're set up, they can hurt you quite a bit financially. They're one of the few loans I'd never recommend under any circumstances. Spend some time looking at alternatives, and you'll likely find a much better, cheaper option.