Car title loans are financial products that allow you to borrow money using your car as collateral. Usually this means that you’re in a crunch and need some money quick, so you hand over the title of your car and a spare set of keys to the lender to use as collateral. You still get to drive the car in the meantime, assuming you’re paying back the loan on time. Which is very difficult to do.
Astronomical Interest Rates
The truth is most people have a hard time paying back what they borrowed from a title loan because the interest rates are ridiculously high, and the repayment period is too short. Chances are if you didn’t have the few hundred dollars to cover whatever bill you’re trying to with the title loan, then you’re not going to come up with that amount plus the interest to repay the loan in just 30 days.
In states where title loans are unregulated, interest rates range from 30 to 36 percent monthly, which comes out to be 360 to 432 percent APR. In practical terms, this means that people who take out the average amount from a title loan, about $950, end up paying $2140 in interest by the time they finally repay the loan. Paying over $2000 to borrow $900 doesn’t sound like such a good deal, does it?
Car Repossession
Remember, you put your car up in order to get this loan. So if you somehow don’t come into all of that extra cash during your repayment period, the lender can come take your car. And they will come take your car. That means no more driving to work, school, etc.
It doesn’t matter if your car is worth 10 or 20 times the amount of your loan. The lender can take your car, sell it at auction, and keep ALL of the profit. There are a few states that require the lender to pay you back the difference between what you owe and what your car sells for at auction, but most do not. This means that you ended up paying thousands of dollars and losing your car, all for a $950 loan. Sounding worse and worse, right?
Alternatives to Title Loans
So how are you supposed to get a quick loan when your power gets shut off and you’re in a pinch? The first thing you should do is call your power company the very first time you miss a payment or make a late payment, and explain your change in finances. Ask for a restructured payment plan or a deferment period until you get back on your feet. They may tack on some late fees or a higher interest rate, but this is better than what you’ll get with a title loan.
Another option is your financial institution. If your credit is okay, you may qualify for a personal loan from your bank, with significantly lower interest rates and better repayment options than a title loan.
Even living in the dark while you sell some possessions, do some yard work for a neighbor, or swallow your pride and ask your family for a small loan is better than a title loan.
Then, the next crucial step is to make a plan to get your finances stable and controlled. Visit our blog for tips and ideas on how to budget and take control of your finances.
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