Considering an auto title loan?  It’s an easy way to raise quick cash.  Think of it like a car pawn broker.  The car’s title is used as collateral.  Fork over a set of keys and you get the cash typically without a credit check.  Just a minute.  Those are the pros.  What are the cons?  The Consumer Finance Protection Bureau (CFPB) considers auto title loans similar to payday loans.  Auto title loans have high interest rates and high re-borrowing rates that can lead to a long-term debt trap.  Recall TheMoneySkinny™ mission is to save you time and money.   Let’s review what an auto title loan is, other options if you are short on cash and a Default Effect caution.

Auto Title Loan

An auto title loan typically lasts thirty days with the finance company holding the auto title as collateral.  Often for twenty-five percent of the vehicle’s book value.  According to CFPB Research over eighty percent of borrowers re-borrow on the same day when the payment is due with more than half the borrowers getting four to five consecutive loans.  One in five auto title loan borrowers have the vehicle seized for non-payment of debt.  This mismatch of short term debt to what can become a longer term issue results in interest rates of up to 300%.  Outrageous.  More information is available at consumerfinance.gov.

Ability to repay Auto Title Loan

Ask yourself if you truly will have the cash to repay an auto title loan in thirty days.  It is a short term fix for a cash crunch.  The worst position is to find yourself seven loan cycles later facing huge debt and no car.  If you realistically will not be able to repay the loan in a month, don’t start the cycle.  Find another solution.

Other Options

Can you refinance the car?  Review The Money Skinny™ article Car Loan Cosigning Considerations to understand the role of a cosigner.  Is a payday loan preferable because the car title isn’t at risk?  Maybe sell the car and find other transportation, even temporarily.  Try Ubering or Lyfting.  A personal loan has much better repayment terms but will require a credit check.  Even a credit card does not charge 300% interest.  Understand why you are short on cash to find the best solution.  If you don’t earn enough money to support yourself, an auto title loan is the wrong trajectory.  It will compound the problem.  Uncertain what to do?  Help Choosing a Credit Counselor is available through the Federal Trade Commission.

No Easy Answers

It’s a be a difficult decision.  A vehicle can impact your livelihood.  It may be your only asset.  Our thirteen-year-old truck died in the driveway.  It was towed to a mechanic.  Diagnosis terminal.  The repairs are more expensive than the truck’s book value.  But, but, but…  Is it worth investing if we get another year out of the truck?  It has 160,000 miles.  The registration is good for six more months.  It has liability insurance coverage only so it’s cheap to drive.  A friend has the same vehicle that’s two years older with 245,000 miles.  He just drove his truck to Connecticut.  No problem.  Exactly how tough is Ford Tough anyway?  While not a lot of money, it’s still not an easy decision.

Default Effect Caution

Be aware of the Default Effect.  Defined in Wikipedia as the option chosen when no choice is made.  With an auto title loan, the default position is renew the loan.  It becomes increasingly difficult to break the cycle as the interest and fees mount.  There is no default effect on our truck.  We have to make the choice.  The mechanic won’t store it indefinitely.  Either pay to repair it or tow it elsewhere.  In summary, not making a decision to payoff or renew an auto title loan means choosing loan renewal.