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What Are Car Title Loans & Are They a Ripoff?

Written by Laura Martinez - 30 Comments

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Tough economic times have people in a financial bind and doing things they haven’t done before. There are those who are living paycheck-to-paycheck when they suddenly get struck with a financial emergency.
What would you do?

Some people turn to “title loans” to give them a quick infusion of cash to tide them over until next paycheck. Are title loans a good option when you’re tight on money or are they a rip-off? And how exactly do they work?

How car title loans work

As the name suggests, a person can borrow money with their car title as collateral. Typically with these loans, there’s no credit check and your application is processed quickly. They’re mainly used as cash advances, and their term is usually 30 days.

The maximum amount someone can borrow varies, but it’s usually no more than 50% of the car’s value. To qualify for the loan, the borrower needs to own the car outright. After assessing the value with an inspection, there is usually a small amount of paperwork and then the money is loaned.

As with payday loans, there are term extensions that some borrowers can take out, but many times this will lead to a cycle of debt with the constant threat of repossession.

Big fees and interest rates

Title loans are not cheap. They tend to have higher interest rates than banks, credit cards, and in some cases, payday loans. As always, there’s a high price for quick cash, and it’s usually to the borrower’s detriment.

When people take out such loans they may see the amount due on the loan, but if they calculated the APR it can be over 100%! Some states, like Florida and Illinois, have placed restrictions on the interest rates and fees charged by these companies. The end result is rates that are still quite high – often around 30% – but more reasonable than in other places.

Too much risk

Putting your car on the line is leaving yourself open to a financially devastating situation. What if an emergency happens and you lose your car? Not only will you be stuck without transportation, but you’ll have given up your car in return for only a fraction of its value.

I think that if someone is having a difficult time paying bills to the point that they need to get a title loan, there is a strong possibility that they can’t afford to replace their car if they lose it.

Don’t think they’ll go after you or they’ll cut you a break? Some title lenders require GPS tracking, and may ask you for a copy of your car’s keys. Lenders do not give out money unless they expect to get it back

How to avoid taking a car title loan

In general terms, you can avoid financial disasters, or at least minimize their impact, by planning ahead and building up an emergency fund. Eliminate excess expenses temporarily or permanently from your budget. Pack your lunch, stay home instead of going to the movies, and cut the cable bill if you have to – any of these are far better than jeopardizing your financial future.

If you can’t cut your budget any further, then consider taking on a second job as an added source of income. Be a waiter or deliver pizzas – do whatever necessary to get more money into your budget. You don’t have to stay at your second job forever.

Save up a comfortable cushion of at least 3-6 months worth of your expenses and you should be able to ride out most emergencies that crop up. If you’re not comfortable at that level, work your way up to 12 months worth of expenses. Stash you funds in a dedicated savings account where you’ll be able to keep it accessible but resist the temptation of dipping into it.

What if you need the money now? Many of the above tips apply. Cut expenses, increase income, etc. If that’s not enough, check with your bank for a short term loan, sell some of your stuff, compare rates against credit card cash advances, or apply for a peer-to-peer (P2P) loan from an outfit like Lending Club. Whatever you do, please think twice before getting a car title loan.

Your thoughts on car title loans

What do you think about title loans? Do they serve a useful need, or are they predatory loans? Have you ever used one? If so, what was your experience like?

Published on November 2nd, 2010 - 30 Comments
Filed under: Automotive,Debt Reduction

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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Comments (scroll down to add your own):

  1. As with most financial products car title loans fill a need in the economy. As far as that goes I do not think they need to be eliminated however I do think they, along with Pay Day loans, need to be heavily regulated.

    The problem is the effective interest rate after calculating fees, interest and possible late payments. I think it is absurd to be able to charge 100% plus. My sister was caught up in one of these and it was a major reason for her filing bankruptcy. I think more transparency and more regulation would go a long way here.

    Comment by Anonymous — Nov 3rd 2010 @ 2:36 pm
  2. I have had a few about 3 and have had two cars repossed after paying a hefty amount I got the cars back. But it was my only way to get a loan at the time. Rip off and I am stuck in one right now and my husband has one.

    Comment by Anonymous — Nov 4th 2010 @ 6:36 pm
  3. My mom got a title loan for her van for $500. The trick is that you have to pay the whole amount back at one time. Because it is a short tern loan the interest can be outrageous. The monthly interest was 25%. Therefore, when she did not have the whole $500, they were “nice” enough to her and told her she only had to pay the interest. It is sad that she put herself through this. She ended up paying them a total of $1125 before getting the title to her van back that she bought for $2500.

    In addition, one of my former co-workers was 49% owner of 40 Title Loan/Pay Day Advance businesses. He state to me that it was legal loan sharking. He said that they now those people cannot pay that money back, and on payday loans they would just wait and wait and go to the banks each day until the check would cash from the customer. He said one woman too almost 18 months to pay back a $300 loans. They let her just pay the monthly interest too at like $75 a month.

    Comment by Anonymous — Dec 22nd 2010 @ 1:00 pm
  4. I worked at a set price dealership and I found that some of those people that had a pay day loans were losing there cars to the loan companys..I am so appalled at these companys that take advantage of people. I found alot of them got the loans from Virginia, which seems to have payday loan companys on every other corner in poor areas and Military bases. Its criminal with what these companys are doing. Put them OUT of business, BAN them and the dealerships that are working with them under the radar.

    Comment by Anonymous — Nov 8th 2011 @ 10:00 am
  5. I happen to be a branch manager at a popular title loan company. Most of my clients come in because banks check credit and turn them down. We thuroughly go over the contract, interest rate and monthly payment that is due.you can only obtain a loan if you are over 18. So you are an adult, responsible for the decisions that you make. You legally enter into the contract, not by force and agree to pay. Yes the interest is high because you are receiving money without a credit check so who knows your true intentions of repayment? Therefore like any other lending institution, we take back the collateral when we are not paid. We LOOSE money if ee have to repo you. We now have repo fees, months without payments and an auction fee. If you vehicle sells for maore than you owe, we return the overage to the client. Long and short is that instead of saying “ban” this and that, just grow the hell up! Do not sign your name to something that you cannot pay back. Do not buy a house or car if you cannot pay. Be responsible, stop asking the givernment to regulate everything like we are ignorant and foolish people. Do it yourself. We all learned a long time ago to make choices and that we have to live with ours. So look at yourself before you start saying “rip off”, because that would make you a fool because you agreed to it! And by the way, it is ILLEGAL to make car title loans for military members or their dependants, so that’s a false statement.

    Comment by Anonymous — Jun 17th 2012 @ 1:25 am
  6. @NY CITY Guy I am a responsible adult and understand that title loan places are RIP-OFFS! I would never use them.

    Comment by Anonymous — Aug 18th 2012 @ 12:02 pm
  7. What is the state agency that governs this industtry?
    Thanks

    Comment by Anonymous — Aug 30th 2012 @ 11:03 am
  8. I really think that it is a rip off and people should find another way to get out of their financial burden. The interest rates are too high ! It is legal loan sharking! They are targeting poor inner city people in a down economy. Many of these people are desperate and need the money. Chances are the are mostly only paying interest on loan and still may loose the car. If they were really there to help interest rates would not be so high.

    Comment by Anonymous — Oct 2nd 2012 @ 7:12 am
  9. There is no reason to ban these, so long as there is adequate disclosure of terms, rates, and consequences of a default – and I would imagine they’re covered by the “truth in lending” laws. If you think it’s a rip off, then don’t use them, but many people lack options.

    The truth is that yeah, they do have a really high effective interest rate, but that is likely because the lender is facing high risks – by the time a borrower defaults, the car could have declined in value quite a bit and could even be nearly worthless. We have competitive lending markets – if it were profitable to do these loans at lower rates or better terms, someone would be doing it right now. It would be great if there were a site comparing the car title loans offered by different companies – it would certainly come in handy to me right now, and likely most prospective borrowers.

    Comment by Anonymous — Nov 8th 2012 @ 1:13 am
  10. @Traci I agree with you. I work for a loan company and we clearly specify the risks that are involved. Contrary to popular belief, we do not make any money off repossessing a car. There are tons of cost involved in repossessing, hiring the tow truck, lot fees, etc.

    Comment by Anonymous — Dec 20th 2012 @ 7:57 pm
  11. Is there anyone out there that is satisfied with a title loan company.A company that was up front about all the fees and will work with you?
    Most people know they are going to have to pay double for the money they borrow but do it any way.
    I there a company with lower rates then most?

    Comment by Anonymous — Feb 7th 2013 @ 1:22 am
  12. The company I work for repossesses a really low number of cars. I’m not sure the exact number, but it’s around 1 or 2 percent. we don’t like doing it; we just have to to stay in business.
    Most of our clients are middle-aged, smart people. A lot of us Las Vegans got our credit wrecked in 2008. These people know that there are lower-interest lending options, but until they improve their credit score, those options are inaccessible.
    I think it’s perceived as a ripoff because we get an unusually high number of people that aren’t good money managers. They’ve exhausted their other resources and come to us without having learned anything. we actually try not to give them money beyond what they can afford, but sometimes things just go wrong.

    Comment by Anonymous — Feb 20th 2013 @ 6:35 pm
  13. I just got a loan of $700 to help with furneral arrangements with my cousin. anyway I have paid $355 on my loan since then and heres the thing only $42 has gone toward the acctual loan still. Im beggin anyone who is thinking about getting one of these loans don’t do it find another way.

    Comment by Anonymous — Apr 4th 2013 @ 11:23 am
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  24. I agree with #5. As a consumer, it is pertinent that we educate ourselves before delving into debt. The purpose of the title companies is a profitable business, like any other. You have to consider the pros and cons of your situation. Just like hiring a contractor, you have to check them out, and make sure they are in good standing. You don’t just hire someone off the street without verifying their credentials. I also agree that when people get ripped off, they tend to blame others, instead of looking within, at the reason they allowed themselves to get ripped off. There is usually a good lesson to be learned, after a big mistake is made, and usually the “victim” is also the volunteer. The service that the title loan companies are offering are for people who, for whatever reason, cannot obtain a loan any other way. And why is that? Usually because the person has made wrong decisions, so it is true, that we all need to learn from our mistakes.

    Comment by Anonymous — Dec 14th 2013 @ 11:42 am
  25. I am in one now. I did a lot of internet search first and realize the interest rates are very high, but it helped me in a tight jam. The biggest advice that helped me is to not borrow one more dime than you absolutely have to and pay if off fast. I researched a lot of different car title loan places and found one, locally that I felt comfortable with. Will have mine paid off in about two to three months. And I make my interest only monthly payment early.

    Comment by Anonymous — Jan 13th 2014 @ 4:48 pm
  26. I took out a title loan in December and made my first payment in January of 2014 in the amount of $1,000.00

    In the meantime, I DID NOT hear from the company until 4 months later requesting a payment.

    I have a lot on my plate, just recovering from radiation treatment so I don’t really have a valid excuse but this slipped my mind until I got the call.

    My question to the rep was, “I should have been called in February requesting a payment not 4 months later”.

    I would like to know if this is legal. How exactly were my funds handled that they held my money or what. Just because I paid the extra money does not mean that I do not pay the following month, but they allowed that. Now they hound mean like a dog!!!!!!!! Is this legal. Then when I notified them of a payment being made and told the rep WALTER I was seeking legal advise regarding the procedures used. His comment to me was I must be having a bad day and call back later. Are they allowed to hold my money 4 months not notified me until they have distributed it how they please

    Comment by Anonymous — May 5th 2014 @ 3:55 pm
  27. I hope I can play devils advocate for a second but think about it from a larger perspective. Two hundred years ago if a financial crisis happened to your family or there was a bill or some crazy life event happened then what were the repercussions? Someone was thrown in jail or maybe a child was taken off to a job that treated them as a slave. Title car loans are not an ideal situation for anyone that needs it but it sure does beat what used to happen to someone hungry and wanted some food for their children.

    Comment by Anonymous — Jun 5th 2014 @ 2:03 pm
  28. I got a title loan back in dec I was not told that even after I make payments on time the amount I owe still goes up instead of down I won’t ever do this again I think I’m charged interest twice a month the 1st being when I make a payment and the when I leave last month my balance was 793 paid 183 balance went to 880 it’s total bull crap they should outlaw the freaking loans they don’t tell u this either when u go in to get the loan

    Comment by Anonymous — Aug 4th 2014 @ 2:27 am
  29. I think title loans are great for small business owners and landlords, ex: a husband and wife were starting a small day care in the area, their startup expenses were higher than planned. But they already had customers and children registered to start the program. They borrowed a few thousand dollars and paid it back about 2 months later. That is roughly, $100-$400 total interest – I know that might seem high to some but it only took 20 minutes, (a bank can take hours or days- if approved). For normal people, that plan on being set up on a 12-24 month repayment plan, these loans are extremely extremely costly. I personally think title loan companies should raise their “proof of income” requirement.

    Comment by Anonymous — Nov 19th 2014 @ 1:14 pm
  30. I was scammed by a title loan company in California, they loaned me $7500, but in small writing they added an extra charge of $2500 I have been paying them for 5 months at $750 per month, I still owe them $7800 and they are total jerks. They threaten me every month to repo my car I have a 2014 Chevy Malibu worth $20000 for $7800. I don’t know what to do I feel like I’m at a lost end!!! Never again

    Comment by Anonymous — May 13th 2015 @ 9:24 pm

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