When faced with a financial emergency and few resources are available, it’s not uncommon for people to start looking at “fast cash” options. One of these is a title loan, which allows you to borrow money using your paid-off vehicle as collateral.
While title loans can seem like a convenient solution to short-term cash flow problems, they carry significant risks – and they can put you in a “debt trap” that you cannot escape. Before you go that route and risk making a bad situation even worse, here’s what you should know:
Why are title loans problematic?
A title loan is a small, short-term loan. It’s the kind of loan that banks usually don’t handle because it can range from just a few hundred dollars to maybe a thousand dollars or two.
In Tennessee, the maximum available title loan is just $2,500, and lenders can only charge 2% interest per month (24% per year). However, they can also charge up to one-fifth of the loan amount in fees, and lenders are creative about those charges. You can end up paying, then, up to $500 in fees on top of the interest that you are charged just to get $2,500.
In addition, the repayment period is very short. You will generally only have one or two pay periods (within 30 days of the loan) to come up with the money to pay off the debt.
What happens if you don’t have all the money when the time comes because you’re already living paycheck to paycheck? The lenders know there is a high probability this will happen, so they will happily let you “roll over” part or all of the debt – for more fees. Over a few short months, you may find that you still owe as much as ever, and you’re pouring all of your money into fees just to avoid having your car repossessed.
Title loans are a trap. If you’re struggling with your bills, it may be time to consider other alternatives, such as bankruptcy.
