Is Applying for a Car Title Loan a Good Idea?

If you’re strapped for cash and want to make some money using your car, then a car title loan is one way to do it. A car title loan is when you put your car’s title up as collateral in exchange for a small money loan. When the loan is paid back, you get the car’s title back. But if you don’t pay it, then the lender can take the car away. Taking that into consideration, is a title loan a good idea?

Most car title loans have astronomical interest rates

 A TitleMax Title loan sign.
A TitleMax Title loan sign. | John McDonnell/The Washington Post via Getty Images

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The short answer is: No, a car title loan, in general, is not a good idea. The main reason that you may not want to get a title loan is due to the exorbitant interest rates associated with it. According to Credit Karma, it’s not uncommon for lenders to charge around 25% of the loan amount every month to finance the loan.

That means if you borrow $1,000 at 25% for 30 days, then you’ll have to pay back $1,250 at the end of the month. That also means that if you calculate the numbers annually, then you would be paying the equivalent of 300% APR. That doesn’t include any other fees the lender may throw at you.

Additionally, if you can’t repay the car loan, then the lender can repossess your car and you can end up paying even more fees to get it back. If you end up not being able to get the car back, then you may need to find another set of wheels. However, the lender may be able to roll you over into another loan, but that loan will have even more fees. Ultimately, a car title loan is a slippery slope as the astronomical interest rates, many fees, and the risk of having your car repossessed make the idea not worth the money that you’ll borrow.

Is it ever a good idea to get a car title loan?

If you have excellent credit, no other debts, and are sure that you can pay the title loan back in the shortest time possible, then a car title loan could be a good idea. However, you may not want to visit one of those small “car title loan” or “payday loan” stores that you drive by on the side of the road. Instead, check with your local credit union to see it offers title loans with lower interest rates. That way, you will have a more comfortable time paying the loan back and likely won’t get caught up in a cycle of fees.

Alternatives to a title loan

A man walks past a firm offering car title loans.
A man walks past a firm offering car title loans. | MARK RALSTON/AFP via Getty Images

Of course, if you can avoid getting a title loan altogether, then stay away. Fortunately, there are some alternatives to getting a title loan:

  • Negotiate your debt: Credit Karma recommends that if your need for a title loan is due to unsettled credit card debts, then try negotiating your debt with the lenders. Doing so could get you out of the dilemma that you’re in.
  • Apply for a personal loan: A personal loan is general “unsecured,” which means that it doesn’t require collateral (like your car). Also, personal loan interest are typically lower.
  • Borrow money from family or friends: If you have family or friends around that will support you and lend you money, then don’t be afraid to call and ask for help. A simple phone call could save you a lot of money and stress.
  • Use credit cards: No one would normally suggest using credit cards over getting a loan, but in the case of title loans, the interest on credit cards could be much lower.

While a car title loan could equate to fast cash when you’re in dire need, it’s not always the right answer. The fees and high-interest rates outweigh the expediency of getting this type of loan. In that case, you may be better off seeking alternative options.

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