Using Auto Title Loans as a Last Resort

Auto title loans can be a quick way to get a relatively small loan by pledging your debt-free vehicle as collateral. But the risks are high and the return is low, so auto title loans should be your last resort.

How an Auto Title Loan Works


To get an auto title loan, you first must have a debt-free vehicle. A lender then will lend you up to 50 percent of your vehicle's value, but auto title loans can be for much small amounts as well.

There typically is a 30-day payout period which can often be extended. Interest rates are high, typically about 25 percent. That means if you borrowed $500, you owe $625 back in 30 days.

The Risk Is Yours

In a typical loan, the lender bears most of the risk. A down payment or security on loans is rarely more than 20 percent of the loan amount. In auto title loans, the security will be at least 200 percent of the loan value. If you default, the lender takes your car and makes money by selling it.

On the other hand, if your car is worth $5,000 and you take out a $1,000 loan that you can't pay, the lender repossesses your vehicle and you are out the entire value.

Digging a Deeper Hole

For many who use auto title loans, it is a time of financial need. The likelihood is great of being unable to repay the full loan amount plus 25 percent interest in 30 days. But if you don't, the balance accrues another 25 percent interest for the next 30 days. Many states limit the extensions you can make, but it is easy to see how quickly you can dig a hole with auto title loans.

And keep in mind, about 20 percent of auto title loans end up in repossession.

Unregulated


Compared to other niches in the lending industry, the auto title loan business is lightly regulated. This means if you get in trouble or have trouble with a lender, there are few alternatives short of costly legal action to protect yourself. About half the states in the U.S. allow auto title loans, and they are only regulated at the local and state levels.

Alternatives

Auto title loans should be a last resort, and you have alternatives before you get there. Alternatives include:

    * A co-signer can help you qualify for a lower-interest loan from a traditional source.
    * Credit unions for the industry in which you work often are more aggressive at helping members, even if you have spotty credit.
    * And don't forget credit cards. Yes, they can get you in a hole as well, but you have much more control over their use, approval can be quick - even with poor credit - and you can consolidate credit card borrowing if you find a lower-interest loan for which you qualify.

Be aware that excessive credit card use - even excessive applications - can hurt your credit score, but in many cases, credit cards are a good alternative to last resort auto title loans because they are not as risky.



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