How Title Loans Work & How To Avoid Them

Highlights

  • Expect to pay 25% interest every month.
  • The average title loan costs $2,000 in interest for a $1,000 loan.
  • You lose your vehicle if you fail to repay the loan.
Bills Bottom Line

A title loan is a loan against your motor vehicle. A title loan might seem an attractive option, especially if you need cash right away and can’t qualify for loan from a traditional lender because of bad credit. Beware; a title loan is an expensive loan, and if you default you will lose your vehicle to repossession. You have alternatives to a risky, expensive title loan.

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Title Loans Work By Charging a High Interest Rate & Repossessing the Vehicle if You Don't Pay

At first glance, a title loan might seem a great idea, especially if you need cash right now and can’t qualify for a loan from a bank or credit union. However, if you take out a title loan you might end up losing one of your most valuable possessions and your only form of transportation. Consider your options instead of a title loan.

How Title Loans Work

Title loan lenders target people who have no credit or bad credit. In fact, it is rare for title loan lenders to check your credit, ask how much you owe other lenders, or even if you have steady income. Title loans work because lenders check to see if you own the vehicle free and clear of other loans, inspect the vehicle to determine its value, and then lend up to a maximum of 25% of its wholesale value.

Title loans work because if you fail to repay the loan as agreed, the lender has the right to repossess the vehicle, sell it, keep its repossession costs, and give whatever’s leftover to the owner. Title loans are risky for borrowers, but virtually risk-free for lenders. Title loans work as a business because the interest rate is typically 25% per month, and borrowers typically take eight to ten months to repay the loan. According to one study, the average $950 title loan costs the consumer more than $2,000 in interest when finally repaid. Title loan lending is a profitable industry.

Consider Title Loan Alternatives

Title Loan Facts
Sources: Center for Responsible Lending and American Association of Responsible Auto Lenders
1 million consumers obtain title loans worth $6 billion annually
21 U.S. states allow title loans
Average title loan is $950 with a 8- to 10-month repayment period
Borrow up to 26% of your car’s value, which you must own free & clear
Average interest rate is 25% per month, or $250 to borrow $1,000/month
Repossession fees are $300 to $400
Between 8% and 17% of title loan customers incur repossession fees

If you plan to use a title loan, consider your six options:

  • Consider working out a payment plan with the lender, seller or provider. Do not use a title loan to pay for rent, food, utilities, or other necessities.
  • Borrow from friends or family.
  • Seek financial aid or a grant from a local charity or government agency.
  • Look into a peer-to-peer loan from one of several P2P lenders.
  • If you plan to use a title loan to pay for a credit card or similar debt, contact either a Either might help you get your finances in order without resorting to a loan.

Why Do Want a Title Loan?

Step back for a moment and ask yourself why you want a title loan. What is the root cause of your financial problem? Are you responding to:

  • A one-time emergency you could not have foreseen reasonably
  • An on-going situation where your expenses exceed your income

Using a title or payday loan is an expensive way to pay your bills, and creates a debt treadmill where you are left worse off than when you started. Although a title or payday loans are tempting because they are so easy to obtain, step back from your situation and look for another solution to your problem.

Start by looking at your monthly cash flow to learn where you are spending money. Create a household budget and list each of your expenses. In particular, look at your debt payments. Can you negotiate new terms for these debt payments to lower your monthly payments? For example, can you:

  • Move your credit card balances to a low-interest card where you make lower monthly payments?
  • Consolidate your federal student loans in a new loan with a longer term?
  • Apply for a forbearance on your student loans?
  • Qualify for your credit card issuer's hardship program to cut the interest rate and monthly payment for a period of time?
  • Cut other expenses, such as:
    • Reducing the minutes on your cell phone plan
    • Dropping channels on your cable or satellite provider, or eliminate cable/satellite altogether
    • Increasing the deductible on your car insurance
    • Eliminating meals away from home
    • Groceries by checking to see if you qualify for food stamps
  • Negotiate payment plans with other creditors, such as medical providers

Focus on reducing the monthly burn rate of your income so that you can avoid "running out of paycheck before you run out of days in the month." Reducing your burn rate may actually cost you more in interest costs the long run for a given loan, but by avoiding costly payday or titles loans, you skip their debt treadmills.

Quick Tip
Unsure how to handle your debt? Let the Bills.com Debt Coach tool give you a customized report on your debt resolution options. It’s free!

After you get your spending under control, pay-off your debts, starting with the debt that's costing you the most in interest expenses first. Once you get one debt knocked off, focus on the next highest-cost debt, and pay it off. Once all of your short-term debts are paid, deposit the amount you used to spend to retire your debts into a savings account. Use this savings for surprise expenses.

Bills Action Plan
Do your best to avoid a title loan because of their cost and the huge risk you face if you cannot repay the loan on time. Find an alternative, such as working out alternative payment plans with the others you owe money to. If you have to borrow, ask you friends or relatives, or seek aid from a local charity. If you plan to use a title loan to make your credit card or similar debts, consider credit counseling or debt settlement as alternatives to "a loan from Peter to pay Paul." Make a budget, cut your low-priority expenses, and create a savings plan to handle emergency expenses.
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2 Comments

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  • PB
    Oct, 2013
    Pam
    Something in the numbers in your story don't add up. You say the average title loan is $950, but elsewhere you write that title loan lenders make 1 million loans totaling $6 billion annually. That means the average loan is $6,000, right?
    0 Votes

    • BA
      Oct, 2013
      Bill
      Some title lenders will lend up to $10,000, depending of course on the wholesale value of the vehicle. Some consumers will borrow more than once per year, which can push up the value of the second statistic you mentioned. Also, title lenders are not consistent about how they report the figures on their loans. Some consider a rollover a new loan, and other lenders consider a rollover a continuation of an existing loan.

      This industry has loose, state-by-state regulation, and inconsistent borrower statistics is one result of this inconsistency.
      1 Votes

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