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Updated on Wednesday, July 2, 2014
A few weeks ago, the MagnifyMoney team traveled down to Chattanooga, TN to host financial seminars and one-on-one workshops. During our one-on-one sessions we consistently heard about men and women who resorted to title loans to get a quick influx of cash in order to pay off a pressing bill – be it rent, medical bills or something important for their children.
One woman told us how she’d borrowed $700 and already paid that back three-times over, but her sky high interest rate on the loan meant the payments barely made a dent in her total owed.
Dealing with title loans can be similar to trying to pay down credit card debt. You keep throwing money at a large number, but so much of it goes towards interest alone with the principle barely moving down.
What are title loans?
Title loans are a vicious form of predatory lending and often prey upon the most vulnerable. Title lenders can charge the interest rates they do because people need cash immediately and feel as if they don’t have any other options.
As the name implies, title loans are the exchanging of your title to a vehicle for a loan. A person goes into a title loan office, often doesn’t need to go through a credit check or much of a verification process, and hands over the title of his or her car in exchange for money. The lender doesn’t particularly care about a credit check because he or she can simply repossess the car if the borrower doesn’t pay. Banks don’t have that kind of leverage with a loan.
Typically, you have 30 days to pay back the loan and/or have set installment payments.
Title lenders make an enormous profit by charging horrifically high interest rates on the loan making it incredibly difficult for the borrower to pay the loan back in a prompt manner.
A study conducted by Vanderbilt University determined the interest rate on a title loan is usually around 300 percent when expressed as an annual percentage rate. However, Professor Paige Marta Skiba noted there are a wide range of interest rates, so there is an advantage to shopping around for the lowest rate – if you are set to get a title loan (which we highly advise against).
Before you get a title loan, evaluate if you do have other options. If you don’t, begin to improve your credit score so over time you can create other options for yourself when another emergency arises.
What if you can’t pay?
Your lender can repossess your vehicle if you can’t pay off the loan. Unfortunately, this means people are incredibly motivated to pay the title lender before almost any other bill because a car is such a necessity.
Should your car be worthless, your lender can still come after you for the money owed.
Why is this legal?
It isn’t legal in all states. Some places have outlawed title loans or set regulations on interest rates. Only 16 states allow title lending at unrestricted interest rates: Alabama, Arizona, Delaware, Georgia, Idaho, Illlinois, Louisiana, Mississippi, Missouri, Nevada, New Mexico, South Dakota, Tennessee, Utah, Virginia and Wisconsin.
Florida, Iowa, Kentucky, Minnesota, Montana, New Hampshire, Oregon and Vermont have restrictions on how high the interest rates can be on title loans – which are still high just not triple-digits.
California, Kansas, South Carolina and Texas still have title loans because of a small loophole in their state legislature. According to ResponsibleLending.org those loopholes are:
- Kansas allows title lending as open-ended lines of credit.
- Texas allows title lenders to use a “Credit Services Organization” model.
- California and South Carolina only cap APRs up to a certain loan amount ($2,500 and $600 respectively).
However, just because payday lenders or title loans are illegal in your state, doesn’t mean people still don’t get them. There may not be brick-and-mortar stores in the state, but these loans can still be found online.
It took no time to find a title loan online in New York, even though they are illegal in the state.
The loan is also marketed in a disturbing manner:
“The cash you receive will be yours to use for anything your heart desires! A title loan can help you cover the cost of:
- a backpacking trip through Europe
- the boat you’ve always wanted
- any home improvement projects
- building a fantastic home theater”
A title loan is horrific enough when used as emergency cash, never use it for a non-essential like buying a boat!
How else can you get a quick influx of cash?
When you need cash immediately, the first step is to find out your credit score. You may have more options than you anticipated depending on your credit score.
You may be eligible for a loan from your credit union or a personal loan from Prosper, Lending Club or OneMain Financial*. These loans will come at much lower interest rates than a title loan.
If you have a strong credit score and are looking to taking preventative action, consider a credit card with a low interest rate – such as PenFed Promise – and charge emergencies to your credit card at a lower interest rate than a title loan.
Even if your credit score isn’t in a strong position yet, try following these six steps to increase your score and after some work you could be eligible for a credit card like the PenFed Promise.
I already took out a title loan – what could I do?
If you took out a title loan – then your goal needs to be getting out of it as quickly as possible. That means improving your score until you qualify for a personal loan to pay it off and get them off your back. You can get a loan from OneMain in the upper 500s – so options are out there. Once you get to the mid-600s, then a loan from Prosper becomes an option.
You’ll be saving a significant amount of money in interest by paying off the title loan and then focusing on paying down a personal loan or loan from a local credit union.
Title loans are nasty business and we wouldn’t recommend anyone gets involved in them, but we do understand how sometimes it may feel like the only option. We want to help put people in a position to have other loan opportunities.
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