Ever heard of a car title loan? Over the last few years the public has learned about all kinds of financial products – from subprime mortgages to home equity loans to payday loans – that have the potential to drag someone’s finances down if they’re not careful. However, there’s one type of loan that hasn’t been publicized much and it’s one that can be quite harmful to your finances: the car title loan.
Car title loans are not as common as home equity loans or payday loans, but they can be equally damaging to your finances if you’re not careful. For example, would you pay someone $2,000 in order to borrow $900 from them? Most likely you would not. However, that’s about the same as what many title loan borrowers end up paying. Below, we’ll take a look at the reasons for car title loans, how to avoid them if possible, and what you can do to pay off a car title loan if you currently have one.
What Is a Car Title Loan?
A car title loan at first might sound like a loan you take out in order to buy a car, but that’s not actually the case. Rather, a car title loan is more similar to a home equity loan – it’s the result of someone needing quick cash and using their car as collateral to borrow money against. In most cases, the lender takes the car title (hence the name) until their loan is paid back in full. They also usually hold onto a copy of the car keys so they can easily repossess the vehicle if the loan is not paid back.
As you can imagine, the danger is that people obviously need their car, and that includes almost everyone who gets a car title loan. They still need their car to get to work, transport their family, etc. So what happens if they can’t pay back the loan and also can’t afford to lose their car? At worst, they will lose the car and have a derogatory mark added to their credit report which can make it harder to borrow money in the future.
Even in the best case scenario, if the loan is paid back, the borrower still stands to be gouged with incredibly high interest rates. A report by the Center for Responsible Lending stated that a typical borrower will pay a 300% APR on their title loan! In fact, the same report said that on average, people borrow $950 and need 10 months to pay it back, which costs them $2,140!
So how can you protect yourself from these exorbitant interest rates? Below we’ll explore how to avoid these loans and what to do if you already have them.
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How to Avoid Car Title Loans
One way to avoid these loans is to make a note in the back of your mind that says “NO WAY!” with regard to title loans of any kind. It’s a good idea to proactively decide not to use this type of loan. Chances are pretty high that you’ll see an ad for car title loans at some point in your life – and you’ll be better off if you’ve already made the decision not to go that route, no matter what financial circumstances you find yourself in.
An NBC News report found that Title Max and Loan Max are the two biggest title lending companies in the U.S. Title Max alone says it has 1,000 stores across the country, with thousands of loans being made each day. These companies also do extensive advertising on TV and on the internet, which brings in even more customers.
Instead of succumbing to an ad, be prepared with alternative means of getting through the tough financial times. For example, everyone should be saving money in an emergency fund that can be used in case of unexpected expenses like a medical procedure or car repair. At the same time, try to keep track of your credit score and do what you can to improve it so that you’ll have plenty of borrowing options if you ever need to borrow money in the future to get out of a jam.
Options for Paying Off Your Car Title Loan
But what if you already have a car title loan? Is there still hope? Well, yes. There are definitely ways to pay off your car title loan, and the best method depends on your particular situation. If you have a good credit score, you will have some good options available to you. For example, you may be able to get a consolidation loan to replace the title loan. Just be sure to work with a reputable company, including a local credit union or bank.
Another option if you have a car title loan already is to revamp your budget so you can allocate more money toward paying it off every month. Hopefully this way you could pay it off very quickly and limit the amount of interest you must pay. To revamp your budget, first make sure you’ve created a realistic budget that covers all your expenses, then start looking for ways to save more money and reduce expenses. While it may seem hard at first, you might be surprised how much you can save if you really try.
Finally, if the two options above will not work, consider downgrading your vehicle. This is obviously a complicated step to take, for various reasons. But if you’re not able to meet your monthly obligations, it might be the only choice. Let’s say you have a car that you bought new, which is now valued at around $10,000. You used the car to get a title loan for $2,000 but you can’t pay the amount back. If you can sell the car for $10,000 and buy a used vehicle for $6,000 then you would have more than enough cash to pay off the title loan and any fees or extra charges. One complication is that the lender may have the title to your car, so you’d need to communicate with them if this is the path you choose to take.
Whatever happens, stay focused on getting that car title loan paid off (ReadyForZero can help with this) and try to avoid paying those exorbitant interest rates. If you have further questions for us, feel free to post them in the comments below.
Image Credit: San Designs
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This post was published by Ben, Content Manager and Writer for » ReadyForZero.
ReadyForZero is a company that helps people get out of debt on their own with a simple and free online tool that can automate and track your debt paydown.Download