Like payday loans, car title loans are small, short-term loans that come with a triple-digit annual interest rate. But while payday loans are secured with a postdated check, title lenders hold the title of the borrower's vehicle -- and a copy of the keys -- as collateral. If borrowers default on the loan, they lose their car.
This fact alone can make car title loans even more dangerous than payday loans, says Jay Speer, executive director of the Virginia Poverty Law Center, a nonprofit organization that fights against unfair lending practices. "Most folks only have one car. If you lose your car, you could lose your job," because you can't get to work.
If you must: Be prepared to give up your car, says Speer. Because title lenders charge hefty fees in addition to high interest rates, borrowers often spend huge sums paying for these extra charges without ever making a dent in the principal. If you can manage without a car, it could be less expensive (and less stressful) to allow the lenders to take it. "All they can do is repossess the car," says Speer. "They can't come after you for more money."