Let’s face it. Life is expensive right now. Inflation is high. The housing market is expensive. Vehicles are expensive. And many of us work jobs with little to no upside income potential. When this happens, sometimes we can find ourselves in need of some extra money. And sadly, about 2 million people will use a title loan this year. But before you do that, let me explain what a title loan is, how it works, and how it can ruin your finances.
What is a Title Loan?
A title loan is simply a loan that is made where the collateral is the vehicle. They usually have extremely high interest rates and short repayment terms. So technically any loan on a vehicle, tractor, boat, trailer, camper, etc. is a title loan. But for the sake of this article, I will not be talking about getting a regular loan from a bank or credit union on a vehicle. I am going to talk about going to a lender and getting an actual title loan.
The idea from the lender’s perspective is that they will give you money in exchange for the title of your vehicle. If you were to default on the loan, they would then get to repossess your vehicle and sell it which would (in theory) repay the loan.
How Does a Title Loan Work?
Here’s how a title loan works.
- You find yourself in need of some money so you go to a title loan business (or website).
- You show/tell them what kind of vehicle you have along with the mileage, upgrades, etc.
- They then offer you a loan in exchange for the title of your vehicle.
- You then repay the loan (typically it is supposed to be within 30 days) and you get your title back.
- If you don’t pay the loan and default on it, the company can then repossess your vehicle. You would then be charged all kinds of fees, repossession charges, back interest, etc.
These loans have a couple stipulations though. The main one being that there cannot be a lien on the vehicle to begin with. That means that you cannot have a loan on it. You have to own the vehicle free and clear.
Also, these companies will not give you the entire value of the vehicle. For example, if you have a vehicle that you own outright that is worth $10,000, the lender will not give you a loan for that amount. They might offer you $5,000 or $6,000. But that loan amount depends on the state (different states have different rules regarding these types of loans).
Dangers of Title Loans
This might not sound too bad, right?
Wrong.
These are horrible loans. Believe me, I did one before.
The typical interest rate on these loans is about 300%.
You might as well go to a loan shark in a sleazy suit in a bad part of town. 300% interest is more than 16x the average credit card interest rate!
DO NOT DO A TITLE LOAN!
In fact, because title loans are SOOOO bad, they have been outright banned in 29 states!
In addition to the absurdly high interest rate, title loans have extremely high fees as well.
But the reason that people still use these companies is because of the ease of getting the loan.
- There is often no credit check.
- There is often no employment check.
- The process of getting the money can be done in as little as an hour.
But don’t let the ease of getting the money overshadow the pain of paying it back PLUS the 300% average interest.
Final Thoughts
I hope I wasn’t unclear. This product is just as bad as a payday loan (and maybe even worse).
If you need cash quickly, you need to sell something that you have, pick up a side hustle, or some combination of the two.
I know I can sound heartless. I understand that sometimes a person’s circumstances can make it difficult (or maybe nearly impossible) to get a side hustle or sell something. But getting a title loan should never be an option.
These are predatory loans designed to prey on the poor and lower middle class.
I have seen people get stuck in a cycle of indebtedness through these companies way too many times in my career.
Stay away from them at all costs.
I am here to help you!
Until next time!
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