If you’re thinking about taking out a title loan, make sure you understand the risks before signing on the dotted line. Title loans, which are high-interest loans that offer you cash quickly, may appear to be a good option if you needed the money yesterday.
But the problem, you're only given one month to pay off the loan—ideally after you get your paycheck. If you need your paycheck to cover other bills or don’t have an emergency fund, you likely won't be able to pay it back within the 30 days.
Find out more about why title loans are a terrible idea and what to do if you already have one and want to pay it off for good.
What Is A Title Loan?
Single payment title loans are short-term, high-interest debts that are secured by your car. A typical title loan has to be repaid in 30 days, and the high interest rate can be in the triple digits.
You will never be able to apply for a title loan at your local bank or credit union. That’s because they don’t offer them.
Instead, non-depository lenders issue title loans. These are the same types of lenders that offer payday loans. Unlike banks and credit unions, title lenders aren’t concerned about whether you’re a big credit risk.
Your Car Is Used As Collateral
These companies look at the value of your car, and they use it to decide how much you can borrow. Keep the following in mind:
- You have to own your car free and clear to take out a title loan.
- As soon as you take out the loan, the lender has a lien against your car.
- While you can drive your car during the borrowing period, the lender has the authority to repossess your vehicle if you fail to make timely payments on the loan.
While a title loan is designed as a “single payment” loan, it might be difficult for you to repay the loan in 30 days. In fact, it’s a high possibility that you may struggle to repay it for months before finally getting rid of the debt.
Unique Dangers Of Title Loans
Title loans have high-interest rates that are considered predatory, and the loans are secured by a car.
These types of loans are risky and high stress because your car can be taken away if you fall behind or miss payments. You likely pulled out the loan because you didn’t have cash in the first place, so having a plan to get that cash to repay it within 30 days might not be realistic.
Your car is probably an important part of your life—it gets you to work, shuttles your kids to and from school or childcare, and takes you to necessary doctor appointments and buying groceries.
Besides vehicle repossession, these are some ways title loans can wreak havoc on your life.
The Loan Isn't Short-Term
Like payday loans (another form of predatory debt), title loans are supposed to be paid in a single payment. Unfortunately, most people who take out title loans can’t repay them in a single payment. More than half of borrowers end up rolling their loans over for four months or more.
Sky-High Interest Rates
A CFPB study showed the median interest APR on a title loan was 317%. The real interest rates aren’t always clearly disclosed since the rate is often expressed in terms of dollars per $100 borrowed. The expensive rates can keep you from saving and paying down other debts.
What Can I Do If I Already Have A Title Loan?
The interest rate on a title loan may feel overwhelming, but you may be able to find a way through the debt. These are some of the top options to consider if you're struggling to pay off a looming title loan.
Sell Stuff To Pay Off The Debt
If you have any high-ticket items such as memorabilia, musical equipment, sports equipment, high-end shoes or bags, try to sell those for additional cash. Any money that you can scrape together can help you get out from the crushing interest rate of the title loan.
Earn Extra Income
Strategically hustling to earn extra cash is the best way to get out of debt quickly. Donating plasma, driving for Uber, and taking on overtime are among the more than 50 ideas we have for making money fast. It’s not easy to hustle, but it can be a key to getting back on track financially.
Find A Lower-Cost Unsecured Debt
We typically don’t recommend playing debt reshuffling games before you’ve addressed financial behaviors. But title loans are an exception to the rule. A title loan puts your car at risk of repossession.
If your car is repossessed, you may be unable to earn income and complete important daily tasks. Finding any type of unsecured debt to pay off a title loan is a win. Even a high-cost cash advance tends to be a better option than a title loan.
Look For Non-Profit Lenders
Non-profit lenders are charitable organizations that have financial programs that can help people trapped in high-interest debts. For example, Exodus Lending, based out of Minnesota, offers 0% loans to Minnesotans with Title and Payday loans who have the means to repay the loan over a year.
Ask For Help From Friends And Family
Friends and family may not have money to spare, but they may allow you to move in for a few months, so you can drop your rent payment and get your title loan paid off. They may be able to connect you to work opportunities or feed you a few meals to help you cut your grocery expenses. Asking for help, even non-financial help can help you make progress.
Connect With A Credit Counselor
Credit counselors certified by the National Foundation for Credit Counseling (NFCC) offer free, customized debt payoff plans. NFCC counselors often offer debt management plans which consolidate debts at modest interest rates.
Title loans are not eligible for debt management plans, but an NFCC counselor may offer strategies for you to repay your title loan while managing other debts.
Talk To A Bankruptcy Lawyer
The American Bar’s Legal Aid provides free and low-cost legal help for low-income families. If you’re stuck in a cycle of debt, bankruptcy may be a good option for you.
Payday Loan Alternatives When You Need Cash Quickly
The average annual percentage rate (APR) on a payday loan can be as high as nearly 400%. Payday loans are costly and you should avoid them whenever possible. Here are eight payday loan alternatives worth considering.
Final Thoughts On Title Loans
Title loan debt isn’t the type of debt you wander into by buying concert tickets, tools, and t-shirts. It’s a form of desperation debt. But the debt that helped you out of one terrible financial situation can quickly become a financial mess of its own.
With a strong foundation in place, you’ll be better able to weather future financial emergencies without a title loan.
Hannah is a wife, mom, and described personal finance geek. She excels with spreadsheets (and puns)! She regularly explores in-depth financial topics and enjoys looking at the latest tools and trends with money.
Editor: Claire Tak Reviewed by: Robert Farrington