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Car title loans are designed for people who need cash fast to pay bills, manage debt or cope with an emergency.
If you own a vehicle outright or owe very little on it, a car title loan — informally known as a “fast auto loan” — can be easy to get. But fast and easy doesn’t necessarily mean good. You’ll pay high fees for this type of loan, and you’ll risk losing your car.
Here are three things to know before you drive away with a car title loan.
1. To get a car title loan, you need to own your car or have equity in it
A car title loan is a small secured loan that uses your car as collateral. Car title loans tend to range from $100 to $5,500 — an amount typically equal to 25% to 50% of the car’s value. The loan term is short — usually just 15 or 30 days. And although it’s called a “car” title loan, this type of loan also applies to other vehicles, including trucks and motorcycles.
To get a car title loan, you’ll need clear title — 100% ownership of the car, without any liens — or at least some equity in your vehicle.
Car title loans are also called “pink-slip loans,” “title pledges” or “title pawns.” The term “pink slip” comes from the pink paper that car titles in California were once printed on.
In addition to your car title, the lender will typically want to see your car, a photo ID and proof of insurance.
If you get approved for a car title loan, you give your car title to the lender in exchange for the loan. You get your title back once you pay off the loan.
2. Car title loans have high fees and interest rates
With a car title loan, it’s not uncommon for lenders to charge around 25% of the loan amount per month to finance the loan. For example, if you get a 30-day car title loan for $1,000 and the fee is 25% ($250), you’d have to pay $1,250, plus any additional fees, to pay off your loan at the end of the month.
This translates into an annual percentage rate, or APR, of more than 300%. That’s much higher than many other forms of credit, including credit cards.
When you get a car title loan, the lender must tell you the APR and total cost of the loan. You can compare this information across other lenders to help find the best offer possible for you.
3. If you can’t repay a car title loan, you could lose your car
If you get a car title loan and you can’t repay the amount you borrowed, along with all of the fees, the lender might let you roll over the loan into a new one. When you do this, you add even more fees and interest onto the amount you’re rolling over.
Let’s say you have a $500 loan with a $125 fee. At the end of the 30-day term, you are unable to pay it all back. You pay the $125 fee and roll over the $500 balance into a new loan with a 25% fee. If you pay your new loan off, you’ll have paid a total of $250 in fees on the $500 you borrowed. If you continue to roll over your loan, you could end up in a cycle of additional fees that make it impossible to repay the lender.
If you find yourself in a situation where you can’t pay off the debt, the lender could repossess your car. And you could end up paying even more in fees to get the vehicle back, along with the past-due amount. Assuming you can’t pull that together, you’ll be left scrambling to find (and pay for) new means of transportation.Car repossession: Will it affect my credit?
Alternatives to car title loans
Car title loans aren’t the only way to get cash quickly. Consider these potential options, which could be less expensive than a car title loan.
Look into a “payday alternative” loan from a federal credit union
As an alternative to dangerously expensive payday loans, some federal credit unions offer “payday alternative” loans (aka PALs) of $200 to $1,000. You have to be a credit union member for at least a month to qualify for a PAL, and you’ll have to pay back the loan in one to six months. But the application fee for PALs is restricted to $20 or less — and the maximum allowed interest rate is 28%. That’s a high rate, but it’s still a lot less than the APR you could end up paying for payday loans, which could even be as much as 400%.
Apply for a personal loan with a co-signer
A co-signer with good credit may help you qualify for an unsecured personal loan. But co-signers have to take on a lot of risk, so finding someone may be difficult. When someone becomes a co-signer, they share responsibility with you for paying back the loan. If you miss a payment, their credit could take a hit along with yours.
Take a credit card cash advance
If you have a credit card with an available balance, taking a cash advance may be a way to borrow money with a lower APR than a car title loan. But cash advance APRs are typically much higher than regular purchase APRs (some cash advance APRs are more than 27%). Also keep in mind that in addition to the APR, you’ll be charged a cash advance fee. It’s common to see a cash advance fee of around 5%.
Before getting a car title loan, consider less-expensive alternatives. If it’s your only option for fast cash, compare a few offers to get the best possible APR, and borrow only what you can pay back within the loan term.
In the meantime, focus on building your credit and establishing a budget. And consider finding a credit counselor to guide you in managing your debt and creating a budget — to help you avoid resorting to a car title loan down the road.