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Car Title Loans: What You Need to Know

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by Navy Federal on November 15, 2016 | Tag(s): Auto Loans

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When you’re in need of cash, you might be tempted by late-night commercials offering quick cash with only your car as collateral. These loans are most commonly known as car title loans, but go by many names—pink-slip loan, title pledge or title pawn. Is this a smart option? Here is what you need to know.

Lenders Love Low-Risk Car Title Loans

Because your vehicle is put up as collateral, these loans are very low-risk for lending institutions. Your vehicle is almost always worth much more than the amount of money loaned. However, these are anything but low-risk for you. Failing to make your payments could result in the lender taking control of your vehicle.

Car Title Loans Often Involve High Interest Rates

Unlike other low-risk loans, interest rates on car title loans don’t accurately reflect their risk. While some are capped at 30 percent per year, others can be significantly higher—as high as 300 percent. Some lenders also charge additional fees on top of the interest. Be sure to look carefully at any fees and the interest rate when agreeing to a loan.

Car Title Loans Have Very Short Terms

30-day terms are typical for these loans. Unfortunately, a month is often not enough time for most borrowers to position themselves financially. So, these loans are often rolled into another term with more interest—by those who can’t pay them back after the term ends. The longer the loan is outstanding, the more borrowers spend on high interest for these loans. This cycle can be difficult to escape and can ultimately cost borrowers their vehicles—even after paying large amounts on the loan.

Look for Alternatives

When you need short-term cash, consider whether the risks of car title loans are worth it or not. Take time to explore other options that could cost you less and don’t involve the same risks. One option that people often overlook is a personal loan. It can provide access to cash when you need it, with lower interest rates and longer term options than car title loans.

This article is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.