The Problem With Car Title Loans

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Your electric bill is due in three days and you don't have enough cash in your checking account to cover it. Or maybe a big credit card bill just arrived in your mailbox and you don't have enough dollars to even afford the minimum required payment.

Should you take out a car title loan, a way to turn the title of your vehicle into quick cash?

Most consumer advocates say "no." Car title loans, they say, come with exorbitant interest rates. And the companies making them target consumers whom they hope won't pay them back on time. This way, the lenders who originate these loans make extra money on penalties and fees.

Read on to learn more about car title loans — and why you should avoid them.

How Title Loans Work

Car title loans are fairly simple. You provide a lender with the title of your car as collateral. You can then usually borrow up to 50% of the assessed value of your car. To not incur any extra fees, you usually must pay the loan back in 30 days.

If you don't pay the loan back, your lender will have your car repossessed. It's why most title lenders require that you drop off a copy of your car keys when you take out the loan.

Exorbitant Interest Rates

The biggest negative with car title loans are the sky-high interest these lenders charge. According to the Federal Trade Commission, title loans typically carry an annual percentage rate of 300%. A report by the Center for Responsible Lending in 2013 summed it up this way: If you borrowed $1,000 for a month from a title lender, you'd typically pay $250 in interest. That is exorbitant.

Predatory Lending

Critics lump title lenders in with the originators of payday loans, saying both types of lenders are predatory. The Center for Responsible Lending, for instance, says that title lenders target consumers who are less likely to pay their loans back on time. Lenders like this because they can then force these consumers to refinance or "roll over" their loans several times, paying more fees and interest each time. When these consumers finally do pay back their loans, the title lenders have earned plenty of profit. (See also: 10 Terrible Loans You Should Avoid)

The center said in its 2013 report that title loan borrowers renew their loans eight times on average, paying an average of $3,391, or nearly three times what they initially borrowed.

And if consumers don't renew their loans and simply stop paying? Then title lenders simply take their borrowers' cars and sell them. Either way, the title lenders make a solid profit on their loans.

Car Title Loans Are Big Business

Car title loans generate plenty of money each year. The Center for Responsible Lending reports that each year, car title lenders earn $4.3 billion in fees on loans that total $1.9 billion. Title Max is one of the bigger of these lenders. The company says that since opening in 1998, it has expanded to more than 1,100 locations in the United States.

Fast Cash Alternatives

You know that title loans are a bad deal. But what alternatives do you have if you need fast cash?

There are some. Of course, they all come with drawbacks, too. It's not easy to find a great deal when you need money quickly.

Your best bet might be to borrow money from family members or friends. Make sure, though, that you pay back these loans quickly. Otherwise, you can easily ruin your relationships.

If you can't borrow money from friends or family, there are always credit unions and banks. You can apply for a personal installment loan from these sources. In an installment loan, you'll pay back a portion of your debt every month, with interest, until it is paid off. Banks and credit unions will charge you interest on their loans, but their interest rates will be far lower than the interest you'd pay on a car title loan. The challenge? You might not qualify for one of these loans if your credit is weak. The application process might take time, too, meaning that you might not gain access to the money you need before your other bills come due.

You can also turn to your employer for help. Maybe you can secure an advance on your next paycheck that you can use to pay off your upcoming bills. The problem here, of course, is that your next paycheck when it does arrive will be smaller. At the same time, your boss might reject your request, and this can make for an awkward office environment.

The truth is, there is no perfect option when you need cash and you need it in a hurry. The best approach is to build up an emergency savings fund that you can tap whenever a financial emergency arises. Financial experts say that you should have at least six months' worth of living expenses saved in one of these funds at all times. (See also: Change Jars and Other Clever Ways to Build Up an Emergency Fund)

That sounds overwhelming, but there's nothing wrong with building up that fund slowly. Deposit what you can each month, even if it's as little as $50. Before long, you'll have grown a solid emergency fund. Then you won't have to worry about title loans or other sources of fast cash.