Though no one enjoys thinking about what would happen if disaster struck, it’s an especially unpleasant thought for people with limited savings and few avenues to financial independence. While many of us would prefer to go with a traditional loan or stay out of debt entirely, unexpected expenses—medical bills, natural disasters, and countless others—can destroy even the best-laid plans. This is where an alternative loan, like a title loan can become a lifesaver.
Understanding the Risk
Lending money isn’t a charitable enterprise, and that holds true no matter who you go to. Each lender has to evaluate the risk of someone defaulting on a loan – as determined by a host of factors – and ultimately come up with an interest rate and fees that make sense for that particular population of clients.
Banks and other traditional lenders can offer low-interest rates, but they’ll turn away anyone with blemishes on their credit history, or at the very least raise the rates significantly. While they might advertise low rates online or in commercials, those usually only apply to a very select population with exceptionally high credit scores. If you’re not in that group, you might not even be approved for a loan, no matter the interest rate.
Since title loans are short-term loans that serve people facing a lot of financial hardship, the risk lenders assume in these cases is much higher, but they offset it with the interest rates they charge. Overall, this makes it possible for people to get loans who might otherwise never have another way to get one.
How to Utilize Best a Title Loan
A title loan is meant to be a mutually beneficial transaction. The desired outcome for both sides is that you get back on your feet and the lender earns a bit of interest on their loan. Win-win.
To achieve the best case scenario, one should understand the best way to make use of a title loan as a resource. While it’s always a good idea to lock in as low of a rate as possible at the outset, don’t be afraid to try to refinance or pay off your title loan with a more traditional loan once you’ve got your feet settled back under you. Doing so will help minimize the effects of compounding interest, which can really rack up the amount you pay over the life of the loan repayment.
Are Title Loans Too Expensive?
A common criticism of title loans looks at the APR, which lumps together loan fees and interest rates. Over long-term loans, the APR appears low, since one-time expenses are averaged out over many years. Since title loans are intended as short-term options (i.e., handling an immediate crisis), the APR model is fundamentally flawed—comparing title loans with traditional loans using this metric is an apples-to-oranges comparison.