Car Title Loans: Good or Bad?

If you need money fast, you may consider offering your car as collateral for a short-term loan. If you agree to such a loan, the lender will place a lien on the car's title, allowing him to repossess it if you stop making your payments. Car title loans have both advantages and disadvantages for borrowers.

Advantages of Car Title Loans

Unlike other types of financing, car title loans don't have a complicated or lengthy approval process. Since you are offering a form of collateral, car loans are relatively easy to qualify for, even if you don't have the best credit score. In fact, many lenders will provide car title loans without even checking your credit score or report. As long as you can show that you have a reliable source of income and a car worth more than the loan you are requesting, the lender will typically approve your loan application.

Car title loans are also an excellent option for borrowers who need their money immediately. As soon as you and the lender agree to the loan amount and terms, you can receive your cash quickly. In many cases, you can walk out of the lender's office with the money in hand on the day you apply for the loan.

Finally, because the lender places a lien on the car's title but doesn't keep the vehicle itself, you can continue to use the vehicle while making payments on the loan. You will lose the use of the vehicle only if you default on the loan and the lender repossesses it.

Disadvantages of Car Title Loans

Car title loans often carry high interest rates. In some cases, these rates are significantly higher than credit cards rates and may even exceed 100 percent. While a few states have laws that prohibit such exorbitant interest rates, many do not. Car title loans are also short-term loans, which means that they must be repaid quickly. If you are unable to make your payments, late fees raise the balance even higher, and the lender will eventually repossess your vehicle, which leads to a host of other problems.

Tips for Borrowers

Car title loans can be problematic, especially if the interest rate is high. Before taking out a car title loan, consider less expensive options. Explore other consumer loans, credit cards, cash advances and even loans from family and friends.

If you must take out a car title loan, make sure that you understand the terms completely. Ask about the APR, as well as any fees that accompany the loan. Finally, make sure that you always make your payments on or before the due date. Otherwise, the lender will add additional fees to the balance, and you may even lose possession of your car.