Find a reputable business?

Business Consumer Alliance Blog

Car Title Loans Can Drive You Into Debt

Car and money

In a pinch, quick, easy cash loans may seem appealing. Many consumers, when facing emergencies or just in need of extra cash, are drawn to taking out a vehicle title loan. Car title loans are small, short-term, high rate loans that use clear vehicle titles as collateral. They are frequently marketed as easy loans consumers can get without a credit check and oftentimes without proof of employment or income. They are also marketed to consumers that cannot obtain a traditional loan from a bank. While they are advertised as a fast and easy solution to your money needs, they often lead consumers into a circle of debt that is hard to escape. They also can put your vehicle at risk. Read on for some important information on car title loans and tips to avoid driving yourself further into debt.

Car title loans are expensive. These loans typically are for 15 or 30 days and have a high annual percentage rate (APR), many in triple digits. The loans are generally made for 25 to 50 of the value of the car, ranging from $100 to $10,000. For example, if you obtain a $500 loan for 30 days, you may have to pay, on average, $125, in addition to the $500 loan amount. Some loans come with additional charges that may include fees for processing, documents, liens, title charges, loan origination, and add-ons.

Before agreeing to a car title loan, it’s important to:

  • Review the loan terms. Under the federal Truth in Lending Act, lenders must disclose the cost of the loan, including the finance charge, APR, and any additional fees.
  • Realize “add-ons” can increase the cost of the loan. Some lenders may require applicants to buy add-ons, such as roadside services, as a condition of the loan. These may drive up the cost of the loan considerably.
  • Know that you will not get your title back unless the loan is paid off. If the loan is not paid off, the lender may repossess the vehicle.
  • Borrow only what you know you can repay by the date the loan is due. Sit down and calculate the cost of the loan against your finances to see if you can afford to accept the loan.

Borrowers can generally pay back their loan in person, online, or through an automatic repayment system. Consumers should be aware that lenders cannot make recurring automatic debits to their account unless they have agreed in advance to the bank transfers. Lenders must also provide a clear disclosure of the terms of the transaction. In addition, the lender must provide a copy of the authorization of the recurring automatic debits. It’s illegal for a lender to require that the loan be repaid through pre-authorized automatic transfers.

If a borrower cannot repay the loan in the timeframe given, lenders frequently offer to “rollover” loans into a new loan, adding on more fees and interest. With rollover loans, the borrower normally will pay the interest amount and have the remaining amount rolled over into a new loan. This is often where borrowers get into trouble because they get caught in the cycle of borrowing and rolling over the loan several times. The fees and interest accumulating may become too much and sometimes it becomes impossible to pay off the debt in full. This is when the lender may repossess the vehicle, putting the borrower in a worse situation because they may lose their only source of transportation to work, school, appointments, etc.

Before deciding to take out a car title loan, it is a good idea to exhaust all other resources first. Some alternatives to consider:

  • Try borrowing money from someone you trust, e.g., friends and family.
  • Take out a small loan from a bank or credit union.
  • Check to see if there are any community-based organizations that offer small loans.
  • Consider a cash advance on your credit card.
  • If you are about to or have fallen behind on payments, contact your creditor to request more time to pay or to request payment arrangements.
  • If your bank allows it, enroll in overdraft protection as an added protection.

General complaints against car title loan companies include payment issues, incorrect repossession, poor customer service, and difficulty paying off loans due to high fees. Business Consumer Alliance advises consumers to research the company before doing business with them. Start by getting a reputation report to find out if the business has complaints, to read consumer reviews, and other information on a business. Also, search the business name online with “complaints”, “reviews”, or “scam” to see what results come up that could have an impact on your decision to do business with the company. Be sure to check that the business is licensed to provide loans in your state.

Keep up-to-date with trending topics, consumer alerts, and information on scams by following BCA on Facebook and Twitter.

Related Topics

What You Should Know About Vehicle Repossession

Credit Repair

About Business Consumer Alliance Business Consumer Alliance (BCA) is a non-profit company that started in 1928. The broad purpose of BCA is to promote business self-regulation. BCA's mission is achieved by assisting consumers in resolving complaints with businesses and using that complaint information, along with other relevant information such as customer reviews, to forecast business reliability. With community support, BCA can identify trustworthy and ethical businesses and warn the public to avoid unscrupulous businesses whose purpose is to defraud the marketplace. BCA also helps businesses promote themselves by providing services and tools to protect their business and reach out to their customers. BCA obtains its funding from member businesses who support the mission and purpose of the organization and who agree to abide by high standards of ethical business practices.