You may have heard of car title loans; they’re often accompanied by phrases such as “bad idea” or “stay away.” Easy enough to say, but what gives this loan such a bad rap? Surprisingly, studies such as this one from Dartmouth University say that despite its bad reputation, payday loans and car title loans actually create a benefit for people by offering a service that is in demand. Take it away and you end up with more overdraft fees, bounced checks, and customers in worse financial shape than before. However, that’s not to say the loan is ideal. When is a car title loan useful and when should you just stay away? Here’s a breakdown of the pros and cons of car title loans.
What Are Car Title Loans?
First of all, let’s talk about what car title loans are. These loans are also referred to as “auto title loans,” “pink slip loans,” and “title loans.” Despite its multiple names, these loans all require one important document: your car’s title or pink slip. This document is to prove that you have paid off your car payments and that you are the sole owner of your vehicle. Car title loans function by using this piece of paper as collateral. You then borrow a loan against the equity of your vehicle.
How Do Car Title Loans Work?
When you take out a loan with a car title company, your vehicle will be evaluated for its equity value. Once the company is able to gauge the approximate resale price of your car, you’ll be qualified for a loan that is equal to the resale value of your car. Each state has different laws concerning how title loans can operate. Some states will have minimum loan amounts or capped interest rates. In the state of California, car title loan companies can only lend out a minimum of $2,500.
You’ll temporarily sign over your car title documents to the title loan company in order to get your loan. Once you’re signed off on the loan, you’re essentially giving the title loan company the legal rights to obtain your car should you default (and not pay off the loan). Companies will allow you to keep and drive your car while you are making payments.
Depending on the company, repayment could be a single balloon payment or an installment plan. The balloon payment is paid off in a single large sum within a short period (this could be as short as a month). However, title loan companies that offer repayment plans in installments offer terms as long as 36 months in order to make monthly payments easier for the customer. Since each state has different laws, it’s important to read the fine print of what each company offers in its terms and conditions.
What Are The Pros and Cons?
It’s easy to villainize title loan companies because of how high the interest rates can be and the daunting fear that you might lose your car. However, many of these companies end up meeting a gap that is otherwise ignored by most. Title loan customers are usually those in dire
financial situations who are unable to get a loan anywhere else. Without another source of help, customers end up bouncing checks, overextending their credit, and overdrafting. What makes this loan so appealing to some despite its riskiness? Here are the pros and cons.
Resource For A Fast Loan
If there was just one attractive quality about this type of loan, it’s how fast you can get a cash resource. And in cases of an emergency, title loans can be a total lifesaver. As much as I’ve read stories of how people have ended up in worse conditions after a title loan, I’ve also read stories of people who have responsibly used one and were in a situation where the title loan saved their fannies. Surprisingly, some title loan companies can even approve your loan in as little as 15 minutes. This can be of great help when you’re in a tight spot and you don’t have time to wait for a bank to approve your loan.
You Can Get A Title Loan If You Have Bad Credit
Title loans are risky for a reason. Title loan companies are the only lenders willing to give out a loan when you have bad credit or a blemished payment history. The lenders themselves are taking a risk by entrusting a loan to someone with an imperfect financial record. Like it or not, title loans are your best bet when you are struggling with bad credit but need a loan. Many companies emphasize the fact that they don’t conduct credit checks or care about your awful financial history. It carries its pros and cons for both parties. But when you’re in a pinch and you need help digging yourself out of a hole, title loan lenders can be a resource when you need a loan.
You Can Easily Qualify
When you go to the bank or the credit union for a loan, it may not be as easy to pass the vetting process. You need to build a relationship with your lender that has a high level of trust on both ends. The lender needs to trust that you’ll be able to pay the money back. Title loan companies on the other hand are considered alternative lenders. They don’t have as strict of a vetting process as banks do. Instead, since title loan companies do away with the long list of formalities and paperwork, they end up making loans accessible to a larger population than the bank. For most title loan companies you can qualify as long as you own your vehicle (and it carries enough equity) and you make a certain amount of income. Considering how many people have difficulty finding the right lender, this could be an option to keep in mind if you’ve hit hard times.
High Interest Rates
Just like payday loans, car title loans are known for their exorbitant interest rates. We’re talking annual percentage rates that can go up to the three digit range (some lenders can go as high as 125%). Again, since laws vary by state, each lender can offer differing interest rates (some can go as low as 36%) so shopping around is necessary. You’ll need to read the fine print and note what the terms and conditions are for each company.
You Risk Losing Your Car
Car title loans are notoriously risky because you risk losing your car if you don’t pay off your loan. That in itself should be an incentive to pay off the loan as soon as possible, even if the payment plan is a longer term.Think about the consequences before you realize your inability to pay off the loan in time!
How To Use A Car Title Loan To Your Benefit
So if you’ve gotten this far into the article, you might be asking, should I even consider a car title loan? Yes and no. Yes, you should be aware that this loan is risky compared to others because of its interest rates. However, under certain conditions you could use this loan responsibly and see it as a helpful financial resource. What are some of these conditions?
1) Only In Emergency Situations Because of the risky nature of a title loan, only use them if you’re in an emergency situation that requires immediate attention. An example would be if your main water line broke and flooded the entire home. In cases like immediate home repairs, car title loans can be helpful because you may not have time to take out a bank loan. Some people have even used title loans as a bridge loan to take care of financial shortcomings in their businesses, but were able to pay it off within a few weeks. If you’re in a situation that is financially urgent, a car title loan can help because it allows you to have access to a quick financial resource.
2) Pay It Off In A Short Term Like credit cards, title loans should be paid off as soon as possible. These loans should be approached as “short-term” loans. Before you take out a car title loan, first consider whether you can pay off the loan within a short frame of time. Although some companies will offer a repayment plan of 36 months to lessen the load, it’s better to give yourself the incentive to get out of debt as fast as you can and remove the risk of losing your car. If you’re going to take out a title loan, pay it back within a few months!
3) Ability to Pay Back
The ability to pay back a loan should be your determining factor of whether you get a risky loan or not. If you find that you’re unable to make payments on time, it is not worth losing your car. Many car title loan companies allow you to keep your car while making payments. But if you default and lose your car, this could be a huge problem for you in the long-run. Only take out a loan if you know you’re going to be able to pay it off.
A Loan Is Not A Solve-All
Loans challenge borrowers to be accountable and financially wise about how one stewards their resources. In any case with any loan, borrowers should equip themselves with supplementary financial resources and financial education. Loans should never be the plan, but just a small piece of the puzzle that makes up the bigger financial picture. So what are some action steps to take?
Have A Plan B In many cases, people who resort to riskier loans do so because there is no plan B. All of their plans fell through and these lenders are their last resort. When this is the case, we encourage you to think of multiple ways you can pay off the loan within a few months. Whether it means you have to sell off your treasured baseball card collection, or eat oatmeal for every meal for those few months, or work 3 jobs, write down a plan so you can make sure that you don’t end up defaulting on the loan. We cannot emphasize that enough—write out a plan and do whatever you can to make sure that you don’t default and lose your car.
Seek Financial Counseling In the times when you do take out a loan, we also encourage you to seek financial counseling as a supplement to your loan. Why? If you’re already in debt and you’re having trouble paying it off, the last thing you need to do is try and figure it out all on your own. The overwhelming weight can be eased if you asked for help. Find a financial counselor and get advice for your situation. Financial counselors can help you see blind spots and help you identify solutions that you may not have otherwise seen. If you’re in denial, a financial counselor will help you sober up to the reality of the situation and help you take steps to solve the problem.
Get Financially Educated
The internet has now become a huge resource for financial education. You can find plenty of apps, videos, and articles that will teach you just about anything and everything when it comes to budgeting, investing, and managing your money. What’s even better is that most of these things are free! You can even go to your local library to find books, videos, and resources that will teach you how to get out of debt and how to manage your money. Many big-name financial gurus will also host radio shows and podcasts that you can listen to on your way to work. Whatever you choose, the most important thing is to take baby steps towards your financial freedom by educating yourself.
Have An Emergency Fund Lastly, start an emergency fund. This may not be a plan you can implement while you are paying off your loan. However, the sooner you get out of debt, the sooner you can start your emergency fund. At the very least, have $1000 stored away for a rainy day to make sure you have something that can help you with future financial upsets. As you start to get out of debt, look to the future and make sure to set aside a portion of your income for the sole purpose of
future emergencies. In the long run, as you build up your savings account little by little, it can grow to be substantial enough where you no longer need to borrow from lenders.