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Short-term loans tend to be worrisome because they usually are obtained through private companies and come with numerous restrictions, high interest rates and penalties if they’re not paid off as promised. Car-title loans are one of them.
If you own your car, it is possible to use it as collateral to get a loan. Most companies that offer car-title loans are betting big that you won’t pay off the loan on time. These companies advertise short-term loans with seemingly reasonable interest rates, though they’re higher than what a traditional lender would offer. If you don’t pay off the loan on time, it likely will be automatically rolled over into a new loan with a substantially higher interest rate — and sometimes a balloon payment.
Maybe you think you’ll be able to pay off this loan on time because your tax refund check is coming. The problem is, you can’t be sure when your tax refund will arrive, nor can you be 100 percent confident you’ll get the refund amount you are anticipating. Your tax refund can be less than what you expect for many reasons. For example, the IRS can use refund money to repay other bad debts you owe, such as student loans or child support. Or, your refund might be less than you thought it would be because of changes in the tax laws or an error on your return.
Even if you worked closely with a tax preparer and you’re confident you don’t have any offsets the IRS is going to attach to your refund, you can’t really be sure what amount you’ll get back until it hits your bank account.
If it isn’t what you expect, or it arrives later than you plan, you could be stuck with a car-title loan that is very costly to pay off. Even worse, you could end up being dogged by debt collectors or have your car repossessed if you can’t repay the car-title loan as promised.
The smart thing to do is to avoid a short-term loan using your car as collateral.
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