Thinking of Getting a Car Title Loan? Read this!
Payday is another week away and you’re short on cash and have little to work with in your savings. You see an ad mentioning how using your vehicle’s title will help you get the money you need to make it through. All you have to do is bring in the title to your car and sign a little bit of paperwork and you will be out the door, no credit check or postdated checks required.
Sounds easy right?
Actually, the only easy part will be getting the money. Repaying the loan will be a far different story. The all too common scenario goes something like this: You’ll turn your title over along with the keys to your car and only receive a small fraction (usually 5-10%) of your car’s actual worth. What makes it worse is not only are you getting a small amount back, you are also getting charged extremely high-interest rates that are upwards of 100-300% APR (Annual Percentage Rate), 8-20%+ MPR. You are then expected to pay the entire amount back within the same month. Below is an example from Investopedia to illustrate what this means in dollars owed:
For example, a $500 car title loan that is agreed to be repaid within a one-month period can carry as much as a 300% APR. This means that the borrower will have to pay the car title loan company $625 in principle and interest to repay the debt. For individuals who need $500 fast, paying an additional $125 in interest within a one-month period may cause additional financial hardships.
Here is where it can get even messier. If you can’t repay your loan one of two things can happen.
You can sometimes roll the loan into another month, but not without receiving increased fees. If you had trouble repaying the debt before, you might now find it impossible to repay with even more penalties and fees attached. Before taking the easy way out, consider how that amount can balloon at a 300% interest rate added on each month the loan is extended. Now instead of paying the $125, you may be paying as much as $250 on top of the $500 originally borrowed.
So, ultimately you’re forced into option #2 to settle the loan in full: relinquishing your vehicle. No grace period is guaranteed. You can expect car title companies to be geared up to repossess your vehicle no later than the last day of the month (or last day of your contract).
So at the end of the day, you can find yourself in a worse position money wise due to trying to repay the original loan and still be out of a vehicle.
There are actions you can take today to prevent this hardship from ever happening.
If you can, save a few dollars from each paycheck now so that should you need to borrow short-term money you are only borrowing from yourself. If your budget feels too tight, it may take cutting some expenses to create room to set money aside. The effort and sacrifice will be worth it when you are able to be your own rescuer the next time an emergency rolls around.
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