Emergencies are no fun, especially when you’re living paycheck to paycheck and you simply don’t have $1,000 lying around to throw at an unexpected car repair or a plane ticket to Duluth so you can pay your last respects to your dear, departed great-grandma.
One option for covering an emergency is to take out a title loan. A title loan is a short-term, high-interest loan that you can get no matter how low your credit score or, in most cases, how small your monthly income. You just hand over the title of your car, agree to pay back the loan plus interest in 30 days, and hold out your hand for a fistful of cash – all within 20 minutes or so.
Sound great? Whoa, not so fast.
Title Loans: The Bane of Many Existences
If you can pay back a title loan plus interest at the end of 30 days, no problem. It’s expensive, but sometimes you have to pay a premium for convenience. But if you’re going to get behind on other essential bills as a result of paying back the loan in full, chances are, a title loan will only add more stress to your life. In most cases, title lenders are happy to roll over the principal for another month and let you pay just the interest you owe, but they’re going to charge you another month’s worth of interest for the privilege. And here’s what that looks like the majority of the time:
You take out a $1,000 title loan at a typical annual interest rate of, say, 360 percent, which is 30 percent a month. At the end of the 30-day term, you’ll have to pay back $1,300. If you can only pay the interest, you’ll pay just $300 and roll over the principal to the next month. If you can only pay the interest again, you’ll pay $300 and roll over the principal again. Do this eight times – which is the average number of times a typical customer will roll over the principal – and you’ll end up paying back a total of $3,400 on that $1,000 loan. That’s right, that’s over three times more than the amount you borrowed. Such is the scourge that is a title loan.
But it could be worse. If you end up unable to pay the loan at all, or otherwise default, guess who legally owns the title to your car? And guess who’s gonna repo your ride? And charge you plenty to do it? And then sell your car to cover the outstanding balance of the loan? And maybe, or maybe not, depending on where you live, send you the money that’s left over after your debt is paid? That’s right! The title lender! They will take your car, they’ll sell it to the highest bidder, and they’ll probably get way less for it than it’s worth.
How Car Title Loans Work
A prospective borrower heads to the lender with their car and its title. The lender assesses the car’s value and offers a loan based on a percentage of that amount. The average loan is $1,000, according to the Pew Charitable Trusts. Borrowers can drive away with the money in less than an hour, but the lender holds on to their title as collateral until the loan is repaid.
There are two kinds of car title loans:
- Single-payment loans require borrowers to repay in one lump sum, usually 30 days later, and have an average APR of 300%.
- Installment loans let borrowers make multiple payments, usually over three to six months, and have an average APR of 259%.
Generally, car title lenders have fewer requirements for potential borrowers, such as not checking credit or requiring proof of income.
Why Car Title Loans are Risky
Think of car title loans as payday loans’ bully brothers.
While their interest rates are lower than those of payday loans, which can have APRs upward of 1,000%, car title loans’ interest rates are by no means low. The upper limit of “affordable” is generally considered to be 36% APR. The fees and cyclical borrowing associated with car title loans make them even more expensive.
And if you can’t pay as agreed, you might lose your vehicle. In fact, 20% of those who take out a short-term, single-payment car title loan will have their cars repossessed, according to a report from the Consumer Financial Protection Bureau.
Car title loans can also lead to a cycle of debt. A vast majority of single-payment loan borrowers renew their car title loans multiple times, incurring fees each time. Just 12% of single-payment borrowers repay without renewing the loan. One-third of the remaining borrowers renewed their loans seven or more times. For a $1,000 loan, that would mean at least $1,750 in fees alone.
There May Be Another Way!
Title loans are convenient, yes. And they’re pretty hassle-free until the balance comes due. But a title loan is the worst possible solution to your financial problems if you can’t guarantee that you’ll be able to pay it off at the end of the initial term. The alternatives may be a bigger pain in the seat of your pants, but they won’t lead you to financial ruin or result in the loss of the family wheels.
So when emergency strikes and the first thing you think of is getting a title loan, stop! Take a few deep breaths, comfort yourself knowing that if all else fails, a title loan is a viable option, and focus your energy on finding another way to get some quick cash that won’t put you in the poor house for the foreseeable future.
1. Contact your local credit union. Some credit unions offer small-dollar, short-term loans at a fraction of the interest charged on title loans. The credit requirements are generally lower for these types of loans, so don’t disregard this possibility if you have less-than-desirable credit. And while we’re on the topic, I should mention that it might behoove you to look into joining a Low Income Credit Union, which provides several excellent services and tools for handling financial emergencies and – more importantly – helping to prevent them in the future.
2. Apply for a credit card. I hate to tell you get a credit card if you have bad credit or a very limited income. Credit cards can escalate into deep debt very quickly if you pay only the minimum amount due and purchase luxuries that you can’t really afford to buy. But having a credit card – and working hard to keep the balance at zero most of the time – can be a godsend in an emergency. And if you don’t abuse your credit, knowing you have that safety net can take an enormous amount of stress out of daily living. Keep in mind that if you have poor credit, your annual interest rate will be pretty steep, but even the very highest of the high annual percentage rates (APRs) for high-risk credit cards are usually in the same ballpark as the monthly interest rates on a title loan. One last tip: Make sure you shop wisely for your credit card!
3. Get military assistance. If you’re in the military, talk to your family support services personnel for a list of resources to help you through the emergency. Different organizations offer cash assistance for various emergencies, such as traveling to support a sick loved one, help with utility bills or medical costs, and similar unexpected expenses. For example, Operation We Are Here is an incredibly wealthy resource for finding help paying for everything from an emergency car repair to your kid’s birthday cake.
4. Work with your creditors. If you need a loan so that you can catch up on rent, utility payments, or another loan, talk to your creditor and try to work out a payment plan. Most will try to work with you to get caught up. You can also contact a legitimate and reputable credit counseling service to learn about your various rights and responsibilities as a debtor and for help communicating with difficult creditors.
5. Get free government assistance for utility payments. The Low Income Home Energy Assistance Program (LIHEAP) is a Federal program that will help you pay your monthly utility bill or get your service turned back on after suspension. Visit the main LIHEAP website to see if you might qualify.
6. Talk to friends and family. See if you can get a small loan from friends or family members. However, be careful: loans among loved ones have a way of backfiring and causing major rifts. For the protection and peace of mind of everyone involved, write up a simple contract, work out the terms and payment plan ahead of time, be okay with paying back the loan along with a reasonable amount of interest, and above all, make a firm commitment to yourself to honor the terms of the loan. Do so, and you’ll probably be welcome to borrow money if another emergency comes up in the future.
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