Car title loans are not generally recommended by any specialist as part of a wise debt management alternative: they are relatively expensive, bearing high interest rates, and there may be a lot of strings attached in the fine print, depending on the lender – some are genuine, respectable businesses, but there is no shortage of shady dealers in this market.
Expensive as they may be, people turn to these loans because they are easily accessible: usually there is no credit check involved, and the transaction may be completed in as little as one hour, so they make great solutions for quick cash. However, it's extremely important to weigh your decision carefully and to understand all the risks involved.
The most obvious of such risks is that of losing your car, if you are unable to make the repayments. It's not in the best interest of the lender to reach this point, so they will do their best to negotiate, but it's still a risk you have to weigh carefully. The repossession rate is rather low – about 17% of people who turn to such loans may find themselves unable to cope with the payments, but only 7% of them actually lose the vehicle used as collateral.
Another issue is the potential damage to your credit score. Even if the lender does not run any credit checks when approving the loan, any case of default will still get reported, particularly if it gets sent to a collection agency. Therefore, it's vital to understand exactly how much you have to pay and when, and to have a reasonable backup plan, in case things go wrong and you find yourself short on cash before the collection is due.
Comparing Car Title Loans to Other Options
Of course, getting a personal loan from a bank or credit union will typically provide better interest rates, but let's be realistic about it: people turn to car title loans because they do not qualify for any product provided by a mainstream lender, either because of a bad credit score, or because they do not fall in required income bracket. Therefore, it's wise to compare these loans with others in the same category, meaning those products that have almost no requirements for approval and a very short turnaround.
There is no surprise that all such loans are quite expensive; that's the only way the lenders can cope with the associated risks. Products in a similar category are payday loans and pawning other valuables, such as jewelry. When analyzing the advantages and the disadvantages, it's important to take these options into account as well – it's always good to know that there are alternatives available, but, more often than not, they will be more expensive than car title loans.