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The beauty of car title loans is that you can still get to drive your vehicle while you’re paying back the loan. While car title loans are an attractive option for borrowers who face an urgent cash need, there are still some risks and dangers associated with this lending option. It is important to be aware of these risks and potential pitfalls so that if you take out a title loan, you can mitigate them and have a good loan experience.
Here are some of the primary risks associated with getting car title loans, plus expert tips on how you can minimize or avoid them altogether.
Risk 1: Having Your Vehicle Repossessed
The greatest and most obvious risk associated with getting a car title loan is losing your vehicle. This risk is just like any type of risk in all sorts of secured loans: the item that you put up as collateral is seized by the lender or loan servicer because you’re not keeping up with your loan payments.
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While this risk may sound scary or dangerous, you take similar risks all the time: If you rent an apartment and do not pay the rent you will be evicted. Same with financing a house through a mortgage or with a pawn loan. If you don’t keep up with your payment obligation, the collateral may be taken.
How to minimize the risk of repossession
Obviously, the only way to avoid this risk is to make your loan payments on time, and eventually paying off your loan. If at any point during the loan you expect that you won’t be able to make your payment by the due date, be sure to proactively communicate with your lender or loan servicer.
Risk 2: Inability To Get Out Of the Title Loan
Another risk that can happen to you when you get a car title loan is having your interest charges balloon – sometimes, to the point where they end up exceeding the principal amount of the loan, resulting in difficulties to eventually get out of your loan. The monthly payments you make for your car title loan is composed of two things: a portion of the payment goes towards paying down your principal, and a portion goes towards interest (and any fees if applicable). When you fail to meet the payment deadline for one month, the accrued interest will continue to pile up, since the missed payment results in a higher outstanding principal, on which the interest is calculated. If you continue to fail meeting the monthly payments, the total interest that will accrue can significantly exceed the amount initially calculated when you signed your loan agreement.
How to minimize the risk of not getting out of the title loan
Again, making your monthly payments on time is crucial if you want to avoid interest charges or penalties that make it harder to eventually pay off your loan. Because the monthly payments are fixed, it can be easy for you to anticipate when and how much you need to pay and hopefully prepare for that. For some people, it helps to set alarms on their phones so that they don’t accidentally miss their deadlines. Other options include taking an honest look at your monthly budget and eliminating or reducing some optional expenses.
Risk 3: A Repossessed Car Gets Sold For Less Than The Outstanding Amount, And You End Up With A Deficiency Balance
While having your car repossessed certainly is the biggest risk that can happen when you put up your car title for a loan, there is another potential disadvantage: if the repossessed vehicle is sold for less than the outstanding loan balance, the borrower is still responsible for the outstanding loan balance, the so-called deficiency balance.
How to minimize the risk of a deficiency balance
When you take out a title loan, be sure to not borrow more than you can comfortably repay. Having manageable monthly payments is your best bet to avoid ending up with a deficiency balance. Also, it’s good to be aware of your vehicle’s value on an ongoing basis, so you have an idea of your potential exposure.
Risk 4: Comparatively High Interest Rates And Fees
While being known for convenience, speed, and high approval rates, car title loans are not considered a low-cost loan option. Therefore, from a cost perspective, it’s possible that an auto title loan can be a poor decision for your finances, especially if you don’t shop around.
How to minimize the risk of high interest and fees
The best protection against overpaying on title loan interest and fees is shopping around. In order to find the best loan option for your needs, be sure to apply with multiple lenders, both secured and unsecured. Getting multiple loan offers can allow you to have the freedom to walk away from one lender’s loan offer, which can work to your advantage if the lender has some flexibility with loan approvals and is willing to negotiate.
Final Thoughts On Title Loan Risks and Pitfalls
At the end of the day, a car title loan can be worth it, offering many benefits, as long as you prepare yourself for possible risks that can happen. Just because there are risks attached to getting a car title loan does not mean you should spook yourself to the point where you decide you no longer want to take consider this loan option, or believe it’s a bad idea to get one. You need to remember that all types of loans will come with some risks, and some are bigger than others.
Once you’ve evaluated the Pros and Cons of getting an auto title loan, you can be well equipped to decide if a title loan is right for you.
The potential risks, pitfalls and dangers of borrowing against your car title can be mitigated by comparison shopping, only borrowing what you can afford to pay back, and being proactive and on top of your title loan payments.
