If you’re in the middle of a financial emergency, you’re not just concerned about paying an unexpected expense. You’re also worried about how that expense will hurt your chances of putting food on the table or making your next rent payment.
If you have bad credit, auto title loans are a way to get quick cash when you need it. But with predatory fees and high interest rates (not to mention the chance of losing your car), auto title loans are almost always more trouble than they’re worth. Here’s why.
How do auto title loans work?
Borrowers who are looking to get cash fast can head to a local lender with their car and title in hand. Lenders require that you own the car outright, so it won’t work if you’re still making payments on the car.
The lender appraises the car and makes a loan offer, typically 25 percent to 50 percent of the appraisal value.
If you complete the application for an auto title loan and get approved, you leave the title with the lender as collateral. Then you walk out the door with a check and typically have 15 to 30 days to repay the loan in full. Some auto title loans are repayable in installments, however.
In the event that you don’t pay back your auto title loan, the lender can repossess your car and sell it to pay off the debt you owe. What’s worse, in some states, if the lender gets more from the sale of the car than the amount you owe, it isn’t required to pay you the difference.
High interest rates lock you into a cycle of debt
Although APRs for auto title loans aren’t as high as APRs for payday loans, high interest rates and fees can result in triple-digit APRs. That’s why it’s no surprise the Consumer Financial Protection Bureau (CFPB) found the following in a recent study about auto title loans:
- Eighty-eight percent of single-payment auto title loans aren’t repaid on time. To avoid repossession, most borrowers take out a new loan to pay off what’s due on the auto title loan.
- More than half of those who reborrow end up taking out four consecutive loans or more. Additionally, two-thirds of all auto title loans go to customers who reborrow six times or more.
- Twenty percent of borrowers who can’t repay their single-payment loan on time lose their car to repossession.
In other words, the cards are stacked against you from the get-go.
New regulations offer some protection against auto title loans
The main reason borrowers get sucked into long-term debt with auto title loans is lenders haven’t required borrowers to prove they can afford to repay the debt.
The CFPB solved that problem in part when it issued a final rule in October 2017. The rule applies to certain auto title loans with repayment terms up to 45 days and requires lenders to:
- Assess the borrower’s ability to repay the loan (previously, no proof of income was required)
- Offer smaller subsequent loans
- Restrict total indebtedness to 90 days
With the new rule in place, it should become harder to get approved for an auto title loan if you can’t afford the payments. Although that means your options are even more limited now, it can prevent your financial situation from getting worse.
The rule doesn’t apply to auto title loans with repayment periods longer than 45 days, however. So, auto title loans with an installment repayment plan won’t be affected.
4 cheaper alternatives to auto title loans
When you need cash now, the conventional advice to cut back on expenses and save doesn’t provide immediate relief.
If you have bad credit, there are several ways to get the cash you need without putting yourself in a precarious position. To avoid getting sucked into a vicious cycle of crippling debt, here are four ways to get quick cash.
1. Sell some of your possessions
If you have stuff you no longer use or need lying around, consider putting it up for sale on Craigslist or Facebook Marketplace. Selling old cellphones, unused gift cards, and items sitting in storage can help you rack up extra cash fast.
2. Get paid for extra work today
Companies such as LaborWorks, Labor Finders, and PeopleReady can help you find day laborer jobs that pay at the end of the day or week. If these companies aren’t available in your area, check out the gigs section on Craigslist to find opportunities nearby.
If you already have a day job, consider asking your employer for an advance on your paycheck. If that doesn’t work, Earnin might be able to help.
Earnin offers payroll cash advances for work you’ve already done but haven’t been paid for yet. You repay the advance when you receive your next paycheck. And here’s the best part: You don’t have to pay fees or interest. The company simply asks that you pay what you think is fair for the advance.
3. Ask for help
If you have family members or friends who can spot you some cash, don’t be afraid to ask. But keep in mind that a bad exchange can damage your relationship, so avoid taking advantage of them.
You also can reach out to creditors to see if you can get a forbearance on your bills for a few months. Then you can take the cash you would’ve used to make your monthly payments and put it toward your emergency expense.
4. Consider a personal loan
You might think personal loans require a good credit score, but some companies specialize in personal loans for people with bad credit.
For example, Avant has a minimum credit score of 580, and OneMain Financial doesn’t have a minimum credit score. The interest rates for these loans can be high but nowhere near as high as interest rates for auto title loans. Also, their repayment terms are more flexible, giving you more than a month or two to pay off the loan.
Just be sure to do your research so you know what you’re getting yourself into.
Avoid auto title loans at all costs
With so many other ways to get cash fast, most people shouldn’t even consider auto title loans as a last resort. As the data shows, the predatory nature of these loans puts many consumers in a worse financial position than they were in previously.
If you’re already stuck in the vicious cycle of debt these loans create, consider using one of the alternatives above to pay off your debt so you can get back on track.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|5.81% – 15.37%1||$5,000 - $100,000||Visit SoFi|
|6.87% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|5.49% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|