You’ve probably seen or heard ads like these. If you need cash quickly, and you’ve had problems getting a loan from a traditional lender like a bank, you may think a car title loan is the answer. The Federal Trade Commission (FTC), the nation’s consumer protection agency, advises you to put on the brakes and understand the costs of a car title loan. You may want to consider other options. A car title loan will put your car at risk: you may lose one of your most valuable possessions and your transportation.
A car title loan — also known as a pink-slip loan, title pledge or title pawn — is a small, short-term, high-rate loan that uses the clear title on your vehicle as collateral. It is a very expensive form of credit. Some lenders offer car title loans if you have equity in the vehicle, even without clear title. These loans typically are for 15 or 30 days and have a triple-digit annual percentage rate (APR) — a much higher interest rate than most forms of credit. Car title loans often are for an amount that is 25 percent to 50 percent of the value of the car. On average, these loans are for $100 to $5,500. But they can be for $10,000 or more from some lenders.
Applying for a Loan
Car title lenders operate out of store fronts and online. Whether you apply in person or online, you’ll be asked to complete a loan application. Online applicants are given a list of title loan stores near them. You’ll need to present your car, the clear title, a photo ID, and proof of insurance to complete the transaction. Many lenders also require a duplicate set of car keys.
If you apply for a car title loan, it’s important to:
Review the loan terms. Car title lenders must give you the terms of the loan in writing before you sign for the loan. The federal Truth in Lending Act treats car title loans like other types of credit: lenders must disclose the cost of the loan. Specifically, lenders must give you the finance charge (a dollar amount) and the APR (the cost of credit on a yearly basis). The APR is based on several things, including the amount you borrow, the interest rate and credit costs you’re being charged, and the length of your loan. In addition to the finance charge, car title loans also may include charges, like processing fees, document fees, late fees, loan origination fees, title charges, and lien fees.
Beware of “add-ons” that can increase the cost of the loan. In addition to your loan, you may have to buy add-ons like a vehicle roadside service plan. The cost of the plan may depend on the value of the loan. If add‑ons are required, they become part of the finance charge/APR, making the costs of credit even higher. In addition, add-ons themselves can be expensive — and add significant payment amounts to your loan.
Once your loan is approved, you get your money and the lender gets your title. You will not get your title back until you pay off the loan.
Title Loans are Expensive
Lenders often charge an average of 25 percent per month to finance the loan. That translates to an APR of at least 300 percent. It could be higher, depending on additional fees that the lenders may require. For example, if you borrow $500 for 30 days, you could have to pay, on average, $125 plus the original $500 loan amount — $625 plus additional fees — within 30 days of taking out the loan.
You generally have three options to pay: in person, through an online system, or through an automated repayment system.
An automated repayment plan is when you authorize a lender to take regular payments directly from your bank or debit card when a payment is due. Lenders cannot make recurring automatic debits unless you agree in advance to these transfers from your bank account — and then, only after you get a clear disclosure of the terms of the transaction. The lender must give you a copy of your authorization of the recurring automatic debits. In addition, it’s illegal for a company to require that credit be repaid through pre‑authorized automatic transfers.
The “Roll Over”
If you can’t pay off the loan in the typical 30‑day period, the lender may offer to “roll over” the loan into a new loan. But the roll over process always adds fees and interest to the amount you originally borrowed. Say you take a loan of $500 for a 30‑day period. But you can’t pay back the full $625 plus other fees at the end of 30 days. You can pay only $125. If the remaining amount is rolled over into a new loan, it would add more fees and interest to the amount you already owe. This may result in a dangerous cycle of borrowing and rolling over the loan amount. You may end up paying more in fees than the amount you originally borrowed, and you may actually find it impossible to pay off the full debt. If you don’t pay what you owe, the lender may decide to repossess your vehicle.
If your car is repossessed, you lose not only your transportation to work, school and other places you need to go, but also the money your car was worth. Some lenders require installation of Global Positioning System (GPS) or starter interrupt devices on the vehicles for repossession, among other purposes.
GPS devices track the location of your vehicle, giving the lender quick access to it.
Starter interrupt devices impair your ability to start the ignition. Sometimes, they’re used for repossession. Other times, they’re used with a system that reminds you to make your payment. Then, you get another code to restart the car.
Some states have laws that force lenders who have repossessed and sold your car to pay you the difference between the sale price and the loan amount. Other states allow lenders to keep the full amount from the sale.
Alternatives to Car Title Loans
Before you decide to take out a car title loan, think about some other choices:
Take a small loan from a bank. Consider a small loan from your bank, credit union or a small loan company. Some banks may offer short-term loans for small amounts of money at competitive rates. Some community-based organizations may make small loans to people, too. A cash advance on a credit card also may be possible, but it may have a higher interest rate than other sources of funds. Find out the terms before you decide. In fact, always shop first and compare all available offers before signing any papers.
Shop for credit. Whether you’re looking for a car title loan or another form of credit, always shop for the best offer. When you’re looking at lending products, compare the APR and the finance charge, which includes the loan fees, interest and other credit costs. You are looking for the lowest APR. Military personnel have special protections against super-high fees or rates, and some states and the District of Columbia impose limits on rates for title and certain other loans. Even with these protections, though, car title loans can be particularly expensive, especially if you roll over the loan and are responsible for paying additional fees. Offers for other types of credit may come with lower rates and costs.
Contact your creditor if you fall behind on payments. If you’re considering a car title loan because you’re having trouble paying your bills, contact your creditors or loan servicer as quickly as possible and ask for more time. Many may be willing to work with you if they believe you’re acting in good faith. They may offer an extension on your bills, in which case you should make sure to find out the charges for that service, such as a late charge, an additional finance charge, or a higher interest rate.
Find a credit counseling service. Contact your local non-profit consumer credit counseling service if you need help working out a debt repayment plan with creditors or developing a budget. These groups offer credit guidance in every state for no or low cost.
Make a budget. Make a realistic budget, including your monthly and daily expenditures, and plan, plan, plan. Try to avoid unnecessary purchases: the costs of small, everyday items like a cup of coffee add up. At the same time, try to build some savings: small deposits do help. A savings plan — even a modest one — can help you avoid borrowing for emergencies. Saving the fee on a $500 car title loan for three months, for example, can help you create a buffer against some financial emergencies.
Enroll in overdraft protection. Find out if you have — or if your bank offers — overdraft protection on your checking account. If you are using most or all the funds in your account regularly and you make a mistake in your account records, overdraft protection might help protect you from additional credit problems. But this service also can have fees and limits. Find out the terms of the overdraft protection available to you — what it costs and what it covers.
Protections for Military Consumers
Car title loans — and certain other financing — offered to servicemembers and their dependents must include special protections under federal law and a Department of Defense rule. For example, the military APR for car title loans offered since Oct. 1, 2007 — with a term of 181 days or less — cannot exceed 36 percent. Most fees and charges, with few exceptions, are included in the rate. Creditors also may not require use of a check or access to a bank account for the loan, mandatory arbitration, and unreasonable legal notices. Military consumers also must be given certain disclosures about the loan costs and their rights as borrowers. Credit agreements that violate the protections are void. Creditors that offer car title loans may ask loan applicants to sign a statement about their military affiliation.
Even with these protections, car title loans can be particularly expensive, especially if you roll over the loan. So you may want to check out financial assistance from military aid societies, including the Army Emergency Relief, Navy and Marine Corps Relief Society, Air Force Aid Society, or Coast Guard Mutual Aid. You may be able to borrow from family or friends, or get an advance on your paycheck from your employer. If you still need credit, loans from a credit union, bank, or a small loan company may offer you lower rates and costs than car title loans.
They may have special offers for military applicants and may help you start a savings account. A cash advance on your credit card may be possible, but it could be costly, too. Find out the terms for any credit before you sign. You may ask for free legal advice about a credit application from a service legal assistance office, or financial counseling from a consumer credit counselor, including advice about deferring your payments.
Military consumers can contact the Department of Defense, toll-free, 24 hours a day, 7 days a week, at 1-800-34- 9647, or at www.militaryonesource.mil. Information on the Department of Defense rule, alternatives to car title and payday loans, financial planning, and other guidance is available.