If you don’t have money socked away in an emergency fund, you might find yourself in need of a short-term loan. One option is to offer the title on your car as the security on a personal loan. This is known as a car title loan and it’s usually small and temporary. It comes with serious risks, however, that are important to consider before you apply for one. Read on to find out more about title loans.
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What Is a Title Loan?
If you own a vehicle and you need money, you could be a candidate for a title loan. With a title loan, you approach a lender and hand over the title of your car, truck or motorcycle. In addition to giving the lender your title, you might also pay a fee to take out the loan. Fees for title loans can be steep.
Car title loans are typically marketed to people who need money in a hurry but have bad credit or thin credit files. One of the reasons why having a good credit score is important is that it gives you access to borrowing options that don’t require you to give up your car title.
With a car title loan, at the end of the loan term, (the length of time the lender has given you to repay what you borrowed) you will have to come up with the cash you owe. Usually, you have 30 days to repay a title loan. If you don’t repay the loan in full, the lender can take possession of your vehicle because you used the title as collateral for the loan.
Your lender might offer to put you on a payment plan, but that might not be much help. Often, these payment plans allow you to make smaller monthly payments but charge triple-digit interest. As your debt grows it can be difficult to get off the payment plan, repay the loan and reclaim the title to your vehicle. Eventually, your lender might repossess your car.
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Car Title Loan Risks
The obvious downside to having a title loan is the possibility that you could lose your vehicle. This is a big financial loss in itself, but it can cause even more problems if you rely on your vehicle to commute to work. Without a car, you might not be able to get to your job on time (or at all). If you lose your job, it’ll probably be difficult to find another one while you’re car-less.
Even if you’re able to repay your loan and reclaim your car title, you’ll be paying a lot of money in exchange for a small loan. So it’s worth shopping around for personal loans with low fees and favorable interest rates if you do find yourself in need of a short-term loan.
Alternatives to Car Title Loans
There are alternatives to car title loans that don’t come with the risk of losing your vehicle and, possibly, your livelihood. You can look to your network and get a loan from friends, family members or neighbors. You might even be able to get help from someone you know through a religious group, a sports club or another activity you’re involved in.
If borrowing money from someone you know isn’t an option, you could turn to peer-to-peer lending instead. Online peer-to-peer lending sites require you to set up a profile, but you won’t have to hand over your car title. Similarly, credit cards (even those with high interest rates) might be a better option because they don’t require you to sign over the title to your vehicle.
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A credit counselor from a nonprofit organization can help you get a handle on your debt and may be able to point you in the direction of resources for loans and grants in your area. A title loan is a highly risky way to get money in a hurry. That’s why it’s a good idea to consider your alternatives – like peer-to-peer lending and credit cards – before putting your car on the line.
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