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Title Loans: What You Need to Know

Ben Luthi

Car title loans are designed for people who need cash fast, whether to cover an emergency expense, pay essential bills or manage debt. Some lenders don't run a credit check and may not even require proof of employment or income, making auto title loans easy to access, even for consumers with a troubled credit history.

But as with many other loans that are accessible to consumers with bad credit, the appeal of these cash loans is overshadowed by their steep costs and harsh consequences if you can't repay what you owe.

[Read: Best Bad Credit Loans.]

What Is a Title Loan?

A title loan offers short-term financing to borrowers who own their car outright or have significant equity in it. Lenders use your vehicle's title -- a document that proves you own your car -- as collateral for the loan and typically require payment within 15 or 30 days.

With such a short repayment term, auto title loans are an expensive form of credit, and even the best car title loans can charge triple-digit annual percentage rates.

"Title loans often fall into the category that many lenders consider as predatory lending," says James Garvey, CEO and co-founder of Self Lender, which offers credit-builder loans.

If you can't manage to repay the debt on time, you may have the option to roll your existing title loan into a new one. But if not, the lender can seize your vehicle and sell it to get back what you owe.

Only 16 states permit auto title loans with triple-digit interest rates, and in six more, auto title lenders take advantage of legal loopholes to skirt outright bans, according to the Consumer Federation of America.

How Do Title Loans Work?

Lenders may offer title loans online or through a physical location. You'll fill out an application to apply. If you're not already at a brick-and-mortar location, you'll need to visit one to present your car.

You'll also need to provide a clear title -- though some lenders don't even require this -- a photo ID, proof of insurance and any other documents the specific lender may need. You may also need to give the lender a second set of car keys. That said, you'll keep your car during the repayment process.

"The borrower just has to walk in with the title and driver's license and sign a few papers," says Sonia Steinway, CEO and co-founder of Outside Financial, an online platform that offers resources on auto financing options and connects consumers with lenders. "The borrower then walks away with a check, direct deposit or MoneyGram. The whole process can take less than 30 minutes."

You can typically borrow between 25% and 50% of the value of your car. Loans can range from $100 to $10,000, depending on the lender. You'll repay what you owe either in person, online or by automatic payment from your checking account.

Interest rates on auto title loans can be extremely high. Lenders may assess a finance charge that includes both interest and fees, and the charge can amount to up to 25% of the loan.

So, for instance, let's say you borrow $800 and the finance charge is 25% of the loan amount, or $200. If the loan is due within 30 days, your APR is roughly 304%. That's far more than what you'll pay even with some bad credit personal loans.

If you can't pay back what you owe, the lender may offer to roll over your existing loan into a new title loan. Doing this, however, will add even more fees and interest to what you already owe and can make it even harder to pay back.

If you continue the cycle, you could end up with multiple title loans, effectively stacked on top of each other. And if you or the lender end your loan before it's fully repaid, the lender will likely repossess your car to recoup the amount you owe. Some lenders even require you to install a GPS device so they can easily locate your vehicle for repossession.

[Read: Best Debt Consolidation Loans.]

Why It's Important to Think Twice About a Title Loan

Given how title loans work, borrowing money this way could cause more problems than it solves.

You could lose your car. The worst-case scenario with a car title loan is that you can't repay the debt and the lender seizes your car. According to a 2016 report by the Consumer Financial Protection Bureau, this happens to 20% of people who take out title loans.

Losing your car could mean you can't drive to work, pick up your kids from school or get somewhere in an emergency.

In some states, auto title lenders are required to pay you the difference between the sale price they get and the amount of the loan. But that's not always the case, which can be devastating to people who are already financially vulnerable. Even if you do get the difference, it may not be enough to purchase a reliable replacement.

You could get in over your head. CFPB research also found that more than 80% of car title loan borrowers take out a new loan on the day the original one is due because they can't afford to pay the first off. And more than half of all title loans turn into four or more consecutive loans by the time borrowers can pay off the debt.

Because every new loan adds more interest and fees into the mix, you could end up in far more debt than you originally planned. And with the odds against you, avoiding the danger altogether could be a smarter strategy.

Alternatives to Car Title Loans

If you have bad credit, you might think you have next to no options. After all, that's why title loans are still popular, despite posing such a threat to your financial well-being.

"Being turned down for a loan because of poor credit can be frustrating and embarrassing," says Steinway. "Many people with subprime credit prefer lenders who advertise explicitly that they will accept all kinds of credit types."

But practically any other financial product is a better option than a car title loan. These alternatives can offer bad-credit borrowers access to funds without as much risk as a car title loan.

Family and friends. Going to family members or friends for money isn't easy. But if you have trusting relationships and are confident you can pay back what you borrow, consider asking for an unofficial loan.

Bad credit personal loan. Some personal lenders specialize in working with people who have bad credit. Interest rates and fees can still be higher than what you'd pay with good or excellent credit. But they're likely much lower than what a title lender will charge you, and you'll typically get a longer repayment term, which reduces the chance you'll need to reborrow to pay back your debt.

Financial assistance services. Depending where you live, your state or local government may offer access to temporary financial assistance. These programs can provide help with medical bills, food, child care, utilities, emergency expenses and more. If you're looking for fast cash to cover any of these, you may be able to get it with no strings attached or expensive debt.

You may also be able to find this type of help through local nonprofit organizations, charities and religious organizations. Garvery says, "Some nonprofit organizations, such as the Mission Asset Fund, offer lower (or even 0%) interest loans."

[Read: Best Personal Loans.]

Payroll advance. Your employer may be willing to provide an advance on your next paycheck. While this can cause some problems when you need that money later on, it can give you some time to figure things out. If your employer doesn't offer payroll advances, services like Earnin allow you to get a payroll advance with no fees or interest required.

Payday alternative loan. Some credit unions offer payday alternative loans to eligible members. The interest rate on these loans is capped at 28%, making them a lot cheaper than even some traditional personal loans.

Not all credit unions offer payday alternative loans, however. Also, "credit unions require borrowers to have been members of the credit union for at least a month before taking out this type of loan," says Steinway, "so it won't work if the borrower needs cash right away." It could be a valid option if you're an established member, though.

Credit counseling. If your financial troubles are a symptom of crippling debt, working with a credit counselor may help you make more room in your budget. Credit counseling agencies may be able to use a debt management program to help you get relief from late payment fees and often contract with creditors at a lower interest rate than you're paying, which can reduce how much you owe each month. Depending on the situation, that could free up some extra cash to help you better manage your finances so you no longer need the help of a short-term loan.

Credit counseling can also help you get your finances back on track for the future. Garvey says, "The ultimate key to breaking the cycle of limited options and high-interest loans is to build the credit you need to gain access to more reputable financial products."



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