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Are Car Title Loans Ever a Good Idea?

Written by Jessica Steer
When you’re in need of cash and under a time crunch, it’s tempting to consider a car title loan as a solution. But like a payday loan, title loans are usually the offering of predatory lenders. Here’s what to expect with an auto title loan and other solutions to consider instead...
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    A car title loan is a secured, same day loan given out over a short period of time in exchange for collateral on your car. Lenders make it an attractive solution, with some even willing to buy out your car in cases where the vehicle is being leased or financed. Car title loans are appealing because they don’t require a credit check and have extremely fast processing times (you can be approved for a loan in under an hour). 

    Can you get an auto title loan on a financed vehicle? 

    You can get a title loan on a financed vehicle. This is known as an auto equity loan; a loan that uses your equity in your car as security.

    How does an auto equity loan work?

    The difference between a title loan and an auto equity loan comes down to full ownership versus part ownership of your vehicle. To get approved for an auto equity loan, you do not need to own your car entirely. Essentially, your equity in a financed vehicle is calculated by using the market value of the car minus what you still owe on it. The maximum amount you can get approved for is equal to the amount of equity you’re deemed to own in the car. While this is a speedy way to get the cash you need, it’s a costly and risky form of financing. 

    Can you get a title loan on a leased car

    Since you don’t technically own a leased car, it is very difficult to get a title loan for this reason. It’s probably not impossible but we do not recommend pursuing this option.

    5 reasons to steer clear of title loans

    While a title loan may sound like a quick fix, if you look closely you’ll discover that, in truth, they’re expensive, risky, and can lead one into a vicious cycle of debt. Here are five reasons to consider an alternative.

    1. High interest rate 

    The annual percentage rate (APR) is the amount of interest you have to pay annually on your total title loan. Like payday loans, APR rates for car title loans can go as high as 300%. Broken down, that means you could be paying between 20% - 25% in monthly interest charges. These kind of interest rates are incredibly high for small loans of a few hundred dollars to a couple of thousand dollars. 

    2. Additional fees 

    In addition to a staggeringly high interest rate, a borrower will also have to pay a processing fee as part of the title loan application. Costs will vary but one thing is clear: they’re unavoidable and required in order to apply for a title loan. 

    3. Car repossession 

    For small loans of a few hundred dollars, pledging your car as collateral is a lot to put on the line. If you fail to make your loan payment in full or even regular partial payments, borrowers can expect their car to be repossessed at any time. If you depend heavily on your car to get around, specifically for work or your family, the loss of your car can lead you into a slew of further financial troubles. 

    4. Rising debt 

    Auto title loans offer borrowers cash, fast and easy. But with astronomically high annual percentage rates, it can be difficult to keep up with payments or repay on time. This is when borrowers are given the option to renew their loans. While a seemingly easy way out, adding a second loan only adds more interest and fees to what is already owing. While it’s possible to repay without renewing your loan, many borrowers end up renewing their loan several times. 

    5. Does not build credit (but could damage it)

    Title loans are usually not reported to the credit bureaus so a positive payment history will not raise your credit score. However, a vehicle repossession will be noted on your credit report and damage your rating.

    Before moving forward with a title loan, consider lower-risk alternatives first such as:

    Alternatives to title loans

    • Request an extension from your creditors.
    • Ask a family or a trusted friend for an interest-free loan.
    • Inquire about overdraft protection or a line of credit from your bank or credit union.
    • Get a credit card cash advance and/or raise your credit card limit.
    • Apply for an unsecured (or collateral-free) personal loan (see below).

    Title loan vs. personal loan

    Personal loan

    Auto title loan

    No collateral required

    Vehicle as collateral

    Fixed monthly payments

    One lump-sum payment or monthly payments

    Builds credit

    Will not build credit

    Available online

    Available online

    Low-to-high interest rate depending on the lender

    High interest rates even though the loan is secured

    Personal installment loans

    Personal installment loans vary greatly from auto title loans in that you do not need to secure the loan with collateral. 

    An unsecured personal loan is available from a bank or online. They offer significantly lower interest rates than car title loans but it can be difficult to get approved if you have a low credit score and apply with a bank. And the process can often be tedious which is frustrating when you need money quickly. 

    Fortunately, an installment loan from a trusted online lender has emerged as a dependable alternative. Online installment loans have a fast application time (two to three minutes in some cases), 24-hour approval periods, and the money can be e-transferred to the your account immediately; you no longer need to leave your home to get the cash you need!

    With regular monthly payments, you’ll be able to gradually pay off your installment loan and not worry about being hit with a massive lump sum payment like you’ll often find with a title loan. Furthermore, your monthly payments are reported to the credit bureaus, which means an installment loan can also help you build your credit rating—something most auto title loans can’t do. 

    The key takeaway

    Car title loans can offer fast cash, but like a payday loan, their incredibly high interest rates and fees can be a slippery slope toward debt. Before considering a title loan, remember that there’s always a better, lower risk alternative. 

    Get approved for a personal loan today

    Banks offer personal loans, but they can be almost impossible to get approved for if you have poor credit. Luckily, trusted online lenders like Spring Financial say yes when the banks don’t by providing personal loans of up to $35,000 regardless of your credit situation.

    Why get a personal loan with Spring Financial:

    • Cash when you need it: Get money deposited into your bank account on the same day or within 24 hours.
    • All credit scores considered: You can get approved even if you have bad credit or no credit.
    • Flexible repayment plans: Choose a short term if you want to pay your loan off quickly or a longer one to make smaller monthly payments.
    • Zero hidden fees: There’s no such thing as application fees or maintenance charges.
    • Skip the bank: Online applications allow you to get approved from the comfort of your home.
    • Trusted & safe lender: Check out the reviews on Trustpilot to see how Spring Financial has helped Canadians across the country with their financial needs.

    Still got questions? We’re here to help. Get the answers you need today online or over the phone at 1-888-556-6441.

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