What is a car title loan?
To get a car title loan, you give the lender the title to your vehicle in exchange for receiving a loan against the equity in your vehicle. Your vehicle is what secures the loan and is the lenders collateral that ensures the lender will be repaid on the loan.
If you default on the repayment you loan you forfeit title to your vehicle. In most cases you will need to pay the lender a fee to borrow the money. Repayment can be as short as thirty days.
Car title loans can be very expensive. If you cannot repay the money you owe, the lender can take your vehicle.
How do car title loans work?
You can get a car title loan online or at a store. This is how they work:
Step 1: You fill out an application, your car title to your vehicle and your photo ID. Some lenders require an extra copy of your car keys or make you buy a roadside service plan.
Step 2: If the lender approves your loan, he gives you the money and keeps the title to your car.
Step 3: When it is time to repay the loan – usually in 30-60 days – you pay the lender the amount you borrowed pus a fee.
How much does a car title loan cost?
Lenders charge a monthly fee. This fee can be a lot, sometimes as much as 25% of the amount you borrow.
You want to borrow $1,000 for 30 days
The monthly fee is 25%
$1,000 x 25% = $250
The amount you owe after 30 days: $1,250
How do I compare costs?
Most loans have an annual percentage rate. This is also called the APR. The APR tells you how much it costs to borrow money for one year. The APR on car title loans can be very high.
When you get a car title loan, the lender must tell you the APR and the cost of the loan in dollars.
What is an APR?
APR is based on: the amount of money you borrow, the monthly finance charge or interest rate, how much you pay in fees and for how long you borrow the money.
You need to borrow $500. You plan to repay the money in one year.
You compare the costs of borrowing that money:
The bank or credit union has a loan with an APR of 7.5%
You will pay $21 in interest to borrow $500
A credit card has an APR of 20%
You will pay $56 in interest to borrow $500
A car title loan has an APR of 300%
You will pay $1,111 in interest to borrow $500
What happens if I need more time to pay the lender back?
The lender might let you borrow the money for another 30 days. This is called, “rolling over” the loan. To roll over the loan, you will pay another monthly fee. If you roll over the loan several times, you might pay be paying a great deal more to borrow the money. Eventually, you might not be able to repay the lender.
What happens if I can never repay the lender?
If you cannot pay the lender the money you owe, he will likely repossess your car. The lender will then sell your car and keep the money. If the lender takes your car, you might lose your only transportation. This could make it hard to get to work, school and other places you need to go.
Consider other ways to borrow money before taking out a title loan.
Can you borrow money from family or friends?
Can you get more time to pay you bills from your other creditors?
Have you considered speaking with a credit counselor about debt consolidation?