Consumers Beware: This Loan Can Charge Interest of More than 100%

The bad guys don't always wear black hats. Sometimes, they stand behind bullet-proof glass and lend money at predatory rates.

Adulthood ought to come with a list of things we should and should not do. For example, it's a good idea to check in with a friend when you know they're not feeling well. It's a bad idea to climb over a zoo enclosure. It's a good idea to wear a life vest while water skiing. It's a bad idea to pick a fight at a professional football game. It's a good idea to build an emergency fund. And it's a bad idea to take out a car title loan when you're in a financial pinch.

What is a title loan?

Imagine that it's the middle of winter and your furnace is making a noise that sounds like a cross between an old jalopy breaking down and two cats in a fight. It's not quite dead, but you know it's on its way. Unfortunately, you don't have the money to pay for the much-needed repair.

And then you see it: An advertisement promising a "no-hassle" loan. The problem is that the loan is through a car title lending company.

Here's how it works

• If you live in a state that allows title loans (many don't), you visit the loan office, either at a brick-and-mortar location or online.
• Its process seems simple enough. You provide the lender with your car title, proof of insurance, and a valid ID. Some lenders require you to own the vehicle free and clear, while others allow you to carry a loan balance. 
• You may or may not be required to provide proof of income and allow the lender to run a credit check.
• Once approved for the loan, you sign a contract. The lender gives you the promised cash but holds on to your car title as collateral.
• Like a traditional loan, you're required to make regular payments. Unlike a traditional loan, the loan must be paid back at warp speed, often within 30 days. In addition to repaying the funds you walked away with, you may be required to pay other fees, including a title certificate fee.
• You realize the interest rate you're paying is high but may not know just how high. Once you've done the math, you learn the interest rate is equivalent to 300% APR.

And then things go south

• You're nearing the 30-day mark and don't have the money to repay the loan, fees, and prohibitively high interest rate. The lender "allows" you to roll the loan over into a new loan with an equally high interest rate and a new set of fees. The average car title borrower rolls their loan over eight times.
• You try to keep up with the ever-rising balance, but it becomes impossible. Your car is repossessed.
• Depending on the lender, you may be able to reclaim your vehicle if you can come up with the cash. Either way, it's a risky proposition. Car title lenders know their customers have few options. If they had options, they certainly would not take out a loan with a 300% APR.

What you can do instead

You wouldn't put your head into the mouth of an angry hippopotamus, and hopefully, you would not borrow money from a car title lender. However, to avoid a title loan, you'll need an alternate plan. Here are a few ideas.

• Check with family and friends. This may not be ideal, but it's better to borrow money from someone who cares about you than from a car title lender.
• If you have decent credit, apply for an unsecured personal loan. Even if you don't have decent credit, there are creditors who specialize in loans for people with poor credit. While their interest rate may be high, it won't be anywhere near the rate charged by title lenders.
• If you're a member of a credit union, speak with a loan officer there. A credit union is more likely to offer a member a short-term loan at a decent interest rate. 

There is absolutely nothing redeeming about the car title loan industry, and it's no wonder that some states will not allow their residents access to title loans. Knowing how predatory the business model is, though, serves as a reminder to keep other emergency options in your back pocket.