What are the Risks of Car Title Loans?

If you’re in a financial pinch, you might be considering taking out a car title loan. That is especially true if you do not have great credit history and your credit score has suffered as a result. Car title loans can seem like a great way to get the money you need and fast, but that does not mean there aren’t very real risks attached to taking out a car title loan.

Before you take out any kind of loan, it is important to know the potential risks involved. That fact remains true for car title loans, so let’s go over the risks of car title loans so you know what you might be signing up for.

High Interest Rates

This isn’t exactly a risk, but it is definitely a less-than ideal aspect of basically all car title loans. Because car title loans are typically short-term loans, and because they are not tied to your credit score, the interest rates are typically quite high. In fact, annual percentage rates on car title loans can reach as high as 300 percent. That means that if you take out a car title loan worth $1000 and it takes you a year to pay it off, you can expect to pay $3000 in interest fees alone! That is quite that hefty toll to pay for a relatively small loan.

Because interest rates are high, the debt you owe on your car title loan can quickly get out of hand. It’s a bad place to be in any loan, but it’s especially bad when it is a secured loan where your property – in this case your car – is being used as collateral.

Damage to Your Credit

It is true that car title lenders do not typically ask for your credit score as a prerequisite for approval, but that doesn’t mean that taking out and failing to pay back your car title loan can’t negatively impact your credit. Some title lenders certainly do report to the major credit score bureaus and if you end up defaulting on your loan, that could lead to a huge drop in your score. That will make it even harder for you to take out a traditional loan, qualify for a credit card, or get a mortgage, and more.

Getting Your Car Repossessed

This is obviously the biggest risk involved whenever you take out a secured loan. When you take out a car title loan, the value of your loan is tied to the value of your car. That means that if you fail to pay your loan, your lender will repossess your car to recoup their losses. While there are instances in which you could have the opportunity to buy back your car, it is highly unlikely that you will be able to do so considering the fact that you will still be on the hook for any money you still owe from the loan that your lender was not able to recoup from selling the car. Also, you’ll be without your car, which will certainly complicate your life – perhaps even more than the debt.

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