What is a car title loan?
To get a car title loan, you give the lender the title to your vehicle in exchange for receiving a loan against the equity in your car.
Your vehicle secures the loan and is the collateral that ensures the lender will be repaid on the loan. If you default on the loan repayment, you forfeit the title to your vehicle.
In most cases, you will need to pay the lender a fee to borrow the money. Repayment can be as short as thirty days.
Car title loans can be costly. The lender can take your vehicle if you cannot repay the money you owe.
How car title loans work
You can get a car title loan online or at a store. This is how they work:
Step 1: You fill out an application, your car title to your vehicle, and your photo ID. Some lenders require an extra copy of your car keys or make you buy a roadside service plan.
Step 2: If the lender approves your loan, he gives you the money and keeps the title to your car.
Step 3: When it is time to repay the loan – usually in 30-60 days – you pay the lender the amount you borrowed plus a fee.
Cost of a car title loan
Lenders charge a monthly fee. This fee can be a lot, sometimes as much as 25% of the amount you borrow.
For Example:
- You want to borrow $1,000 for 30 days
- The monthly fee is 25%
- $1,000 x 25% = $250
- The amount you owe after 30 days: $1,250
How to compare costs
Most loans have an annual percentage rate. This is also called the APR. The APR tells you how much it costs to borrow money for one year. The APR on car title loans can be very high.
When you get a car title loan, the lender must tell you the APR and the cost of the loan in dollars.
Car title APR
APR is based on: the amount of money you borrow, the monthly finance charge or interest rate, how much you pay in fees, and how long you borrow the money.
For example:
You need to borrow $500. You plan to repay the money in one year.
You compare the costs of borrowing that money:
The bank or credit union has a loan with an APR of 7.5%
You will pay $21 in interest to borrow $500
A credit card has an APR of 20%
You will pay $56 in interest to borrow $500
A car title loan has an APR of 300%
You will pay $1,111 in interest to borrow $500
Needing more time to pay the lender back
The lender might let you borrow the money for another 30 days. This is called “rolling over” the loan. To roll over the loan, you will pay another monthly fee. If you roll over the loan several times, you might pay more to borrow the money. Eventually, you might not be able to repay the lender, and you will be in default.
Severe consequences if unable to repay lender
If you cannot pay the lender the money you owe, he will likely repossess your car. The lender will then sell your vehicle and keep the money. If the lender takes your vehicle, you might lose your only transportation. This could make it hard to get to work, school, and other places you need to go.
Car title loans are high-risk loans. You should consider other ways to borrow money before resorting to this type of loan:
- Can you borrow money from family or friends?
- Can you get more time to pay your bills from other creditors?
- Have you considered consulting with a bankruptcy lawyer?
Source: For more current information on car title loans, go to Consumer.gov
