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If you’re short on cash, an online title loan may sound like a convenient option.
According to a Pew Charitable Trust report, about 2 million Americans turn to high-interest automobile title loans every year. Online title loans allow you to borrow money and use your car as collateral to secure the loan. Similar to payday loans, these title loans are designed to cover an emergency or other short-term expenses. If approved, in exchange for the loan, you’ll give the lender the title to your car until the loan is paid in full.
Online title loans may sound appealing because some lenders don’t require a credit check and you may be able to get funds the same day. You can also continue to drive your car while you pay off the loan. But title loans can trap borrowers in a cycle of debt that’s hard to reverse.
What is an online title loan?
Car title loans are secured by the value of your car. Depending on a number of factors — like the lender, how much your car is worth and the laws in your state — the amount you can borrow may range from $100 to $10,000, although the average auto title loan is about $1,000, according to the Pew Trust. Online title loans can be convenient if you want to start the process online or you want to set up an account electronically to check your balance and make payments.
Terms for online title loans are usually about a month long, although they may last more than a year depending on the state. The costs of these loans often translate to an annual percentage rate of around 300%. Because of the high APRs that come with these types of loans, they should always be a last resort.
Steps to take out a title loan online
Here’s the application process for a typical online title loan.
- Find your car title. You’ll typically need a free and clear title.
- Complete the online application and upload documents. You’ll typically need to submit a photo ID, the loan application and proof of income, address and insurance. Some lenders won’t check your credit.
- Wait as the lender reviews your application and appraises your car. Once you submit an online application and documents, the lender may contact you to ask a few questions about the car or your application. If the lender requires an in-person appraisal, someone may come to your home or ask you to drive to a storefront. Some lenders ask for a copy of your car key or will install a device that either tracks or prevents the vehicle from starting, which helps them find and repossess the vehicle in case you default on the loan.
- Sign the contract. If approved, you can electronically sign the contract and hand over the car title.
- Receive money. Some online lenders may offer to wire the money directly to your bank account.
The lender will keep your car’s title until you repay the debt, but you will get to keep the car — so long as you continue to make payments. And keep in mind that the application process, along with requirements for approval, varies by state.
Where are title loans legal?
Many states allow title loans, while other states impose restrictions or don’t allow title loans. Depending on where you live, title loans may not be available or be available for less than you need. Make sure to check your state law to see what’s available in your state.
The following states allow title loans: Alabama, Arizona, California, Delaware, Georgia, Iowa, Idaho, Illinois, Indiana, Massachusetts, Missouri, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Wisconsin, West Virginia.
These states impose restrictions on title loans: Alaska, Florida, Kansas, Kentucky, Louisiana, Maryland, Maine, Michigan, Minnesota, Mississippi, Vermont, Washington.
These states do not allow title loans: Colorado, Connecticut, Hawaii, Oregon, Rhode Island, South Dakota, Wyoming.
Risks of online title loans
Online title loans may seem great once you have the cash, but the drawbacks may not be worth it.
They are expensive
The average borrower pays an eye-popping $1,200 in fees over a year on a $1,000 loan, according to the Pew report.
Although lenders will typically charge either fees or interest — not both — they’re bad for your wallet. And remember, online title loans typically have APRs of around 300%.
It’s easy to drive up your debt
Most borrowers end up paying so much in fees or interest because they often can’t pay off the loan in time. When this happens, the lender may offer to renew or “roll over” the loan for a fee — as long as state law allows it. This is when debt can begin to pile up for many borrowers. According to the Consumer Financial Protection Bureau, about a third of borrowers roll over title loans six or more times, keeping people in debt for longer than they’d planned.
You might lose your car
If you default on a title loan, the lender can seize the car. One in five borrowers has their vehicle seized by the lender, according to a 2016 report from the CFPB. So if you use the car to get to work and lose your vehicle, your financial situation could worsen without reliable transportation.
Scams that are more difficult to avoid
Aside from the sky-high costs, another risk to taking out an online title loan “is the online environment itself,” says Bruce McClary, vice president of communications for the National Foundation for Credit Counseling. “You don’t really know who you’re dealing with.”
For example, some predatory lenders may have hidden fees or bury their terms on their site, making it harder to figure out what you’re really getting.
Alternatives to online title loans
“Before you take out an online title loan, check your credit scores,” McClary says. You might qualify for other types of financing, “meaning you could avoid going to a car title lender altogether,” he says.
Not sure if an online title loan is for you? Here are a few alternatives.
- Personal loans: Many lenders offer secured and unsecured personal loans, although your loan terms and your likelihood of approval will depend on a number of factors that include your credit. Before you apply for any loan, make sure the payment plan fits in your budget. If your loan is unsecured, you won’t risk losing your vehicle or other property.
- Credit card cash advance: Some credit card issuers may offer an unsecured line of credit known as a cash advance. These are essentially short-term loans you take out against your credit card’s available balance. But cash advances can be very expensive.
- Payday alternative loan: Some federal credit unions offer these low-cost loans that range from $200 to $1,000. Interest rates can’t exceed 28% and the money must be repaid in one to six months.
Although an online title loan can be an option to get you fast cash, you may end up paying more than you thought you would. Only about 12% of borrowers manage to pay back their loan, fees and interest with a single payment without quickly reborrowing, according to the CFPB.
“It’s not a good route to travel on your journey of financial health,” McClary says. “You’re going the wrong direction when you use one of these title lenders.”