You need money fast, but what if a bad credit score keeps you from accessing traditional short-term loans or lines of credit? Taking out a car title loan is one way to get your hands on some fast cash with no credit check and minimal income verification. This may sound pretty straightforward, but this kind of loan can lead borrowers deeper into debt and, in extreme cases, without a car.
How Car Title Loans WorkIf you were to take jewelry or other valuables to a pawn shop, an employee behind the counter would appraise your items and give you a loan based on what your items are believed to be worth worth. In this case, the pawn shop will lend you money and charge interest. If you don't pay back the money within the agreed-upon time frame, you will forfeit your items. This is similar to how a car title loan works. (For background reading, see Should You Pawn Your Valuables?)
In a car title loan, the lending company evaluates the price of your car based on wholesale values and then gives you a loan based on what it thinks your car is worth. The lending company then holds on to your car's title until your loan is repaid. The loan isn't similar to when you bought your car. This loan is a short-term loan with a hefty interest rate; if you don't pay back the money within a set time frame – with interest – you've essentially sold your car to the lending company by default.
Who QualifiesBecause this type of loan is based on equity you've built up in your car, with most title loan companies, you will be required to own your car outright. If you still owe money on your car loan, your car's title is still in the hands of the bank, so you can't use it as collateral for a loan. Other requirements may include a minimum age, proof of your residence and proof of your income.
Read the Large and Fine PrintDriving your car to the title company to expediently get the money you need may seem simple enough, but before you give this loan the green light, you need to know what you are legally committing yourself to. Look for the following information within your contract:
- How interest is calculated and the time period for which the interest rate is calculated. For instance, a 3% interest rate may seem OK until you read on and see that it's 3% per month, which is equivalent to 36% per year. Also keep in mind that because car title lenders are in a different category than credit card companies or banks, they are not subject to usury laws, and are therefore able to charge higher interest – much higher interest.
- What the penalties are for late payments or nonpayment. Could one late payment cause your car to be taken away? Does the loan's interest rate increase or are additional fees assessed for late payments?
- What are the mitigation rules? Are you required to go through mediation, or can you take the loan company to court if it becomes necessary down the road?
Alternatives to Car Title LoansAs with any loan, it's important to evaluate what other alternatives you may have for acquiring the money you need. Compare the interest rates and penalties of other loan options that might be available to you.
- Credit cards: If you need money in a pinch, make sure you compare the rate on your credit cards with that of a car title loan. If your credit card doesn't have a high enough limit to cover the money you need, call your credit card company and ask for a higher limit. The better your payment history is with them, the better chance you have of the credit limit increase. You'll still want to make sure to compare the rate, which should be lower than borrowing with a car title loan. (To learn how to evaluate credit card interest rates, read Understanding Credit Card Interest.)
- Emergency loans from work: Your company might have an emergency loan program available to help employees with short-term financial binds. Programs vary from employer to employer, but the loan may be interest-free or have a low interest rate set by your employer. Repayment terms also vary. Contact someone in your company's human resources department to see if this is a service available to you.
- Payment extensions: If you are thinking about borrowing money because of an emergency situation, such as needing money to pay your utility bill or rent, find out if the payee (your utility company or landlord) will give you a payment extension. A 30-day payment extension on your utility bill or a five-day extension on your rent could save you from spending hefty interest on a car title loan. If you do receive permission to pay your rent late (payment extension), make sure you get the rent extension in writing so you don't go to work one day and come home to find the locks removed. And, be sure to ask your apartment's management company what your late fees will be, so you can carefully weigh your options.
- Personal loan from your bank: Banks offer personal loans with interest rates that are lower than car title loans, but might not be better than your credit card rates. The benefit of a personal loan with a bank is that you can discipline yourself to pay it back in a set time frame because there are a set number of months in which you have to pay back your loan.
- Payday loans: Although payday loans can also charge high interest rates, you won't lose your car if you break your contract through late or non-payment. (For further reading about payday loans, see Payday Loans Don't Pay.)
- Pawning other Valuables: If you plan to get a loan or sell a valuable asset to get the money you need in a hurry, it might as well be an asset that you can afford to risk, such as a guitar you don't play anymore or jewelry you never wear. Along the same lines, you might be able to receive more money for your items if you are willing to wait a little longer, for example by selling your stuff through an online auction or online storefront, such as eBay or Amazon.
Bottom LineCar title loans are one way to get money when you need it on the double, but they're not the only way. If you need money fast, research other options, such as credit cards, personal loans, payment extensions, payday loans, workplace emergency loans and selling items you no longer use.