Title loans are high-interest, over-secured loans that people with bad credit or a low income can get when they don’t qualify for a prime rate bank loan or even a credit card. These high-interest, over-secured loans are specifically designed to keep borrowers in a cycle of debt that grows bigger and bigger with each inflated interest payment you make.
And listen carefully: Unless you can afford to pay back your title loan in full at the end of its term, there really is no best possible title loan. Choosing between any two title lenders is like choosing whether you’ll die slowly from a knife in the stomach or quickly from a bullet in the head.
So really, the best way to shop for the best possible title loan is to realize that there is no best possible title loan and stop shopping, period.
But you’re gonna do what you’re gonna do, and if you’re gonna do a vehicle title loan, at least do your due diligence and shop around for the least horrible loan you can find.
What is a Title Loan, Again?
A title loan is where you hand your car’s title over to a lender, get back a quarter of what it’s worth, pay back waaaay more than you borrowed, and then get your car repossessed because you can’t make that last payment. Sometimes, the lender will repossess your car if you can’t pay off the loan at the end of the first month. That’s the bullet to the head, and believe it or not, you may be better off in that scenario.
Other times, the lender will string you along and let you roll over the loan for months and months, during which time you’ll be paying astronomically high interest payments that will likely add up to at least twice the actual amount you borrowed. That’s the knife in the stomach. The lender will let you bleed out for a few months before swooping in to take your car, just as a cat will bat a poor mouse around for a while before eating it.
How to Find the Least Horrible Title Loan
Before you start shopping, familiarize yourself with these 15 Title Loan Terms You Need to Understand Before You Sign the Dotted Line. Then, go down your list of potential lenders and follow these tips for choosing the awful one instead of the horrible one:
- Find out the annual interest rate. The average title loan has an interest rate of 25 percent a month. That may not sound terrible at first, because hey, you’ve had credit cards with an interest rate close to that, right? Wrong. Your 21 percent credit card interest rate was the annual percentage rate, or APR. The title loan’s interest rate of 25 percent a month translates to a 300 percent APR. What this means is that if you borrow $1,000 and keep rolling over the loan for a year, you will end up paying $4,000 back: $3,000 in interest plus the principal.
So choose the lowest possible interest rate you can find. When you’re quoted an interest rate, ask if that’s the monthly rate or the APR. Federal law requires that lenders express interest rates as annual percentages, but title lenders usually don’t, and the Feds don’t really enforce that law anyway. So ask. Chances are, the lender will tell you it’s the monthly rate, and they won’t be able to tell you the annual rate for some inexplicable reason. No problem. You have fingers, so do the math: Multiply the monthly rate times twelve, and that’s your APR.
- Find out if there’s a forced arbitration clause. Too many title lenders engage in unscrupulous practices, and if you sign a contract with a forced arbitration clause, your right to take any complaints or disputes before a judge will be waived. Guaranteed, you’ll have a heck of a time getting the lender to agree to anything, including forking over the surplus proceeds from the sale of your car after they recover what you owe on the loan. Don’t do it.
- Find out what fees may be charged and whether any add-ons are required. Astronomical interest rates are one thing, but many title lenders charge additional fees on top of the interest, and still more make you purchase special insurance coverage as well, such as comprehensive coverage, life insurance, or roadside assistance. Some of the fees that you may see in a title loan contract include origination fees, lien fees, processing fees, document fees, title fees, and late fees. If your car is repossessed, you may be charged a repossession fee, even though these are illegal. But imagine trying to recover a $400 repossession fee from a title lender without being able to take it to court because you signed a contract with a forced arbitration clause! Don’t do it.
- Find out if there’s an early repayment penalty. Also known as a prepayment penalty, this penalty will make sure you’re thoroughly punished for trying to pay off your loan early. If you take out a title loan with a term longer than 30 days, there will most likely be an early repayment penalty, which means that if you come into some money and want to pay the loan off three months early to save yourself a thousand dollars’ worth of interest, you may be charged that thousand bucks anyway, even though you’re not keeping the money for those months. No lender wants you to go and save yourself a thousand dollars by paying your loan off early (where’s the ridiculously high profit in that?) but you’ll have no choice if you sign a contract that says you have to pay that interest no matter what. Don’t do it.
- Find out how many times you’re allowed to roll over the loan. When you take out your loan, you’ll probably do so with the intention of paying it back at the end of the initial 30-day term. But if you live paycheck to paycheck, chances are, you’re not going to pay it back (plus 25 or so percent in interest) in another 30 days. That’s how these loans are designed, after all. So you’ll need to pay just the interest and roll over the principal for another 30 days, at the end of which you’ll owe it plus another 25 percent in interest. Some lenders let you roll over the loan indefinitely, which could be much worse, since you’ll pay a ton of money in interest each month before you finally realize you’re screwed either way and default just to get the inevitable over with. Other lenders limit the number of times you can roll over the loan, and if it’s not paid off by then, you’d better find a good pair of walking shoes! The average title loan customer rolls over the loan eight times.
If you can’t find a title loan that doesn’t seem sure to lead you to financial ruin, it may be time to try again to find the funds you need elsewhere. Otherwise, things could be a whole lot worse for you in the coming months.
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