You’ve probably seen an ad for a title loan at one point or another. Maybe you were watching daytime TV, where title loan companies often advertise their product. Or perhaps you were looking for loan options online.
At first glance, title loans sound appealing. Title loan companies will explain how you can get your money the same day you apply and that it doesn’t matter if you have bad credit, all you need is a car title. Of course, if something sounds too good to be true, it usually is. Here’s everything you need to know about how title loans work.
You Give the Lender Your Car Title to Secure the Loan
To qualify for a title loan, you’ll typically need to own a car with a lien-free title. When you go to get the loan, the lender will inspect your car and look it up in a vehicle value guide. Using the guide and the condition of your car, the lender will estimate its current market value, and then lend you up to a certain percentage of the car’s value.
The lender takes your car title for the term of your title loan. You get it back when you repay the loan, but if you default, the lender can repossess and sell your car.
Legality Varies Depending on the State
The first thing to understand is that quite a few states have made title loans illegal. Among those states that allow title loans, the regulations vary. Certain states put almost no restrictions on title loan companies, whereas others regulate the industry much more heavily.
Title Loans Almost Always Have High Interest Rates
The typical loan or credit card will have an annual percentage rate (APR) of 36 percent at most, which is the APR lenders reserve for the borrowers who present the highest risk.
Many title loan companies charge 25-percent interest per month, for a sky-high APR of 300 percent. That means if you borrow $1,000 and plan to pay it off within 30 days, you’re looking at a $1,250 payment.
Each state sets its own interest rate limit for title loans, but unfortunately, many either don’t set a limit or have very high limits. Even in states with lower limits, such as Texas, title loan companies often find loopholes so they can charge higher amounts.
Title Loans Are Short-Term Loans
Title loan terms are also set by the state. In most states, title loan companies go with 30-day terms. A select few states require longer terms. If you can’t pay your title loan off in full when the payment is due, you can almost always extend it by paying whatever you owe in interest. You’ll then begin a new term with another interest charge.
The problem with this is it makes it very easy to fall into a cycle of debt after getting a title loan. The typical consumer will extend a title loan multiple times, only paying interest without ever making a dent in his loan principal.
Getting Your Car Back Is Expensive
In some states, title loan companies must give you a certain time period after you’ve missed a payment, known as a right to cure. If you make your payment or extend the loan within this time, they can’t repossess your car. Other states allow the title loan company to repossess your car as soon as you default.
Once the lender repossesses your car, you’ll need to pay whatever you owe to get it back. Many states allow lenders to charge you for their repossession costs and a daily fee for storing your car. If you can’t pay this, the lender simply sells your car.
You Could Still Be Liable After the Sale of Your Car
If the lender sells your car but the amount it makes on the sale doesn’t cover what you owed, some states allow the lender to pursue you for the deficiency balance. Others don’t. If the amount of the sale is more than what you owed, some states require the lender to send you the surplus, but others let them keep the money.
With their short terms and high APRs, title loans should be avoided whenever possible. If you need one as a last resort, make sure you have a plan for paying it back by the due date.