Why You Should Avoid Car Title Loans

If you need money, getting a car equity loan or car title loan is rarely a smart financial decision.

Why You Should Avoid Car Title Loans

If you are need of money, you may be thinking about getting a loan against the value of your car. This is commonly called a car title loan, auto title pawn, or car equity loan. Although these types of loans are advertises on the Internet and radio as a good solution to your financial troubles, they rarely are. Here's why you should avoid getting a car title loan. 

(Learn about other "get cash fast" options to avoid.)

How Do Car Title Loans Work?

When you get a car title loan, a bank or other financial institution agrees to make a secured loan against the value of your car. You keep and drive the car, but the lender keeps the title as security for repayment of the loan, as well as a copy of your keys.

Dangers of Car Equity Loans

These loans are dangerous, because missing even one payment can mean losing your car, even if the car is worth far more than the amount you owe. Lenders may also ask you to use your home, as well as your car, as collateral. This means that if you miss any payments, you risk losing your house as well as the car.

Also, these loans can come with a steep interest rate because your car is considered a used car and its value rapidly decreases. For example, you might pay $63 to $181 for a one-month $500 title loan. Monthly finance charges of 25% (300% annual interest) are common.

Special Regulations for Members of the Military

Auto title loan businesses often target members of the military. Under federal law, creditors cannot charge service members who are on active duty for more than 30 days or their dependents more than a 36% annual percentage rate on a loan for 181 days or less on a vehicle when the creditor takes the vehicle’s title as security. (This limit does not apply to loans used to purchase the vehicle in the first place.) 

This is an excerpt from Nolo's Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Margaret Reiter and Robin Leonard.

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