Drawbacks of car title loans
Money borrowers can make use of their car title as a collateral for getting a car title loan. In exchange for the amount of the loan, the borrower needs to submit his/her car title as well as (temporarily) surrender the car title hard copy. In case the borrower defaults on his/her payments then the lender can repossess the car and sell it in order to repay the borrower’s debt. Below is some information about the workings of a car title loan, its drawbacks, and the alternatives.

How do car title loans work?

• The borrower provides their car with the title and the lender provides a loan based on the valuation of the car.

Why can car title loans be dangerous?

• Though interest rates for car loans are much lower than other payday loans, the cycle of debt created by borrowing more and more to pay off prior loans can make car loans a slippery slope.

What is a cycle of debt?

• In order to repay previous loans that people cannot afford, a large number of people end up taking more loans or borrowing more money to pay off the previous loan. They renew their car title loan multiple times and incur fees each time from various loans.
• Only 12% of single payment borrowers are able to repay existing car title loans without renewing the loan or loaning more money.
• A third of borrowers renew their loans more than seven times. For a loan of around $1000, which means about $1750 of fees alone.
• A report found that almost 80% of existing car title loans are renewed single payment loans.
• For the average American, repaying a car title loan may take up half of their monthly income and repaying a loan as a balloon payment is almost impossible.
• Many people borrow money from friends and family members to pay off their existing loans.
• Installment car title loans can also create a cycle of debt and almost 30% of borrowers end up defaulting on their loan. About 10% have their car repossessed.

What are the alternatives to car title loans?
Following are some of the alternatives to auto car title loans:

• Side job – Taking up a side job alongside regular job can help raise the extra amount of money one is looking for.
• Pawning possessions – One can get extra cash by selling possessions and borrowing against them at pawn shops. This helps because pawn shop loans are much lower than car title loan interests.
• Loan from friends and family : Loans from family members or friends is also a good alternative as it is more flexible, can come up to be much cheaper, and you don’t risk losing any of your possessions.
• Personal loans from banks – Personal loans are a good option despite having bad credit, as they cost lesser in the long term. They offer interest rates that are lower than car title loans.