Is Applying for a Car Title Loan a Good Idea?

If you’re short on cash and want to make some money from your car, then a car title loan is one way to do it. A car title loan is when you put the title of your car as collateral against a small cash loan. When the loan is repaid, the title of the car is returned to you. But if you don’t pay it, the lender can take the car away. With that in mind, is a title loan a good idea?

Most auto title loans have astronomical interest rates

A TitleMax title loan sign. | John McDonnell/The Washington Post via Getty Images

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The short answer is no, a car loan is generally not a good idea. The main reason you may not want to get a title loan is the exorbitant interest rates involved. Accordingly credit karmait is not uncommon for lenders to charge around 25% of the loan amount to fund the loan each month.

That means if you borrow $1,000 at 25% for 30 days, you have to pay back $1,250 at the end of the month. It also means that if you calculate the numbers annually, you would be paying the equivalent of 300% APR. That doesn’t include any other fees the lender may throw at you.

If you are unable to repay the car loan, the lender can repossess your car and you can end up paying even more fees to get it back. If you don’t get the car back in the end, you may have to find another set of wheels. However, the lender may be able to convert you to another loan, but with even more fees. Ultimately, a car title loan is a slippery slope because the astronomical interest rates, many fees, and the risk of your car being repossessed make the idea not worth the money you’re borrowing.

Is Getting a Car Title Loan Ever a Good Idea?

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If you have excellent credit, no other debt, and are confident that you can pay off the title loan in a short amount of time, a car title loan might be a good idea. However, you may not want to visit one of those little “car title loan” or “payday loan” shops that you drive by on the side of the road. Instead, check with your local credit union to see if they offer title loans with lower interest rates. This way, you’ll be more comfortable repaying the loan and you’re not likely to get caught in a fee cycle.

Alternatives to title loans

A man walks past a company that offers car loans.

A man walks past a company that offers car loans. | MARK RALSTON/AFP via Getty Images

Of course, if you can avoid getting a title loan, stay away. Luckily there are some Alternatives to a title loan:

  • Negotiate your debt: Credit Karma recommends that you attempt to negotiate your debt with lenders if your need for a title loan is due to unpaid credit card debt. That might get you out of the dilemma you’re in.
  • Apply for a personal loan: A personal loan is generally “unsecured,” meaning no collateral (like your car) is required. Interest rates on personal loans are also usually lower.
  • Borrow money from family or friends: If you have family or friends who support you and lend you money, don’t be afraid to call and ask for help. A simple phone call can save you a lot of money and stress.
  • Use credit cards: No one would normally suggest using credit cards instead of a loan, but in the case of title loans, credit card interest rates could be much lower.

While a car title loan can mean quick cash when you’re in need, it’s not always the right answer. The fees and high interest rates outweigh the convenience of getting this type of loan. In that case, it might be better to look for alternative options.

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Virginia C. Taylor