A title loan can be a very useful financial instrument if you utilize it correctly. However, it can also have some scary consequences that are certainly not something you should ignore. Unfortunately, a large number of people sign up for title loans without considering the effects they’ll have to deal with later, and end up disappointed with the financial issues they face as a result. This has created a somewhat negative reputation for title loans.
In reality, when used wisely, they can be just as good as payday loans with no credit check. You just need to understand what you’re getting yourself into, and consider alternative options that could prevent the need for this in the first place.
Understand the Consequences
Defaulting on a title loan has some pretty bad implications. Losing the title to your vehicle is obviously something you would want to avoid at all cost, especially if that vehicle is tied to your main source of income. A title loan may also be more difficult to repay than a regular loan in the first place, because they often come with higher interest rates. You might see rates significantly higher than other types of loans available to you, and that’s completely normal for this sector of the market.
That’s because your credit history is largely irrelevant here. Creditors will only look at the value of your vehicle when determining how much you’re allowed to borrow. Because they have a solid collateral for that loan, they can afford to take the risk and lend out money to people who might potentially have a bad credit score.
Look into Other Options
Try to investigate other lending options first. There should always be something available on the market that does not require you to sign away the title of your car. Of course, be careful with those substitutes – you don’t want to jump from one problematic loan type to another! Borrowing from friends and family is always something you should prioritize before considering an option like a title loan. It might not always be a pleasant experience, but it’s much better to deal with that issue once and be done with it, rather than face the consequences of a botched title loan deal.
Borrow Within Reasonable Limits
If you have an expensive car, you might find yourself facing some great opportunities for borrowing. Many lenders would be willing to go as far as 50% of the car’s value, although you’re more likely to get something around 25% in most cases. This is not necessarily a positive thing though. It may make you more careless, putting you in a state of mind where you’re more likely to borrow a large sum of money. After all, if you’re already planning on repaying the original loan that you wanted to take out, what’s the harm in getting some extra cash, right?
Wrong. That’s the way most people ruin their finances in the first place, and being careless with a title loan is the last thing you want to do when borrowing money. We already listed several reasons for that above. Keep in mind that some companies that deal with title loans may attempt to make a particularly enticing offer to you, as they understand the state of mind most people are in when taking out a loan of this type in the first place.
Be Prepared for Defaulting, But Make Sure You Don’t
Last but not least, understand what will happen if you default on the loan, and have some backup plan for dealing with that. Sure, it might not be pleasant to think about that situation in the first place, but if you’re taking on a risk like that, you need to know that you can deal with whatever it brings about. Losing your car doesn’t have to be the end of the world, although it can certainly mess up your life on a great level. If you need to drive to work, this might prevent you from earning money in the foreseeable future!
That said, look into what you can do to circumvent those problems if they ever arise, and prepare yourself for that situation. But your top priority should still be to avoid defaulting on the loan in the first place. It’s not impossible to prevent that from happening – you just need to be careful when taking out the loan, and know your financial situation well enough to deal with it later on. And if you do things right, you might discover a whole new world of opportunities created by the extra financial freedom that a title loan can provide you with. From then on, you should develop a more responsible attitude towards your finances in general. These things come with time and experience, and you shouldn’t be surprised if you have issues with them in the beginning.