Risks and Rewards of Using Credit to Pay Off Your Title Loan
February 22, 2018 | By Emma Frost
It sounds so easy to get the money you need with a title loan. And with promises like these, it’s no surprise that over 2 million Americans use title loans to borrow against the value of their vehicle every year.
You’ve heard all the sales pitches…
"Get fast cash today!"
"Bad credit? No problem!"
"Keep your car while you make payments!"
But when those loans come due, will they have the funds to repay it? And can you use credit cards to pay off title loans? Learn more about the surprising realities of title loans and find out if using credit cards to pay them off is right for you!
The Unexpected Price of Title Loans
So, how do people find themselves stuck paying more in title loan fees than they originally borrowed? The answer is sadly closely related to how most title loans and payday loans are structured. And it’s also why renewals make up a majority of the business this market enjoys.
But what actually makes these lending options so expensive?
Research suggests it may be due in part to how people shop for an use them. That means lenders are competing with each other over regional business rather than by offering competitive rates.
About 80% of all title loan borrowers shop for speed and convenience rather than price when it comes to selecting their lender. Are you one of them?
If you own your car outright and have found yourself short on cash, the idea of selling it all together or taking out a title loan to help you make ends meet after a financial emergency may have already crossed your mind. And a title loan can be an excellent way to unlock the value of your car without parting with it – if your cards right.
But having a string of bad hands is unfortunately not as uncommon as we’d like to think. Here are just a few of the top title loan facts from The Pew Charitable Trusts that you might want to think twice about before making the leap:
Title Loans by the Numbers
- Annual percentage rates for title loans average at about 300% APR, depending on the state your in and its regulations.
- Title loan customers borrow an average of $1,000.14 in title loan cash and pay a whopping $1,200 in fees when it’s all said and done.
- High APRs make it hard for customers to keep up with the cost of borrowing. Their loss is often the gain of lenders, however, with lenders making approximately $3 billion a year in fees alone.
- About 11% of title loan customers every year have their car repossessed – for one in three borrowers, this means losing the only vehicle in their household, which could spell disaster for their income.
- People borrow for various reasons: only about 3% is used for a borrower's small business, while over 9 in 10 title loans are taken out for personal reasons. Over half of all borrowers report using them to manage their everyday expenses as opposed to a financial emergency.
Now that you know a little bit more about the numbers behind the title loan industry, you might be wondering how you can avoid getting sucked into the title loan quicksand yourself. This brings us to the next form of credit (or debt) we’re here to discuss today: credit cards.
Could Credit Cards Help You Get Out of Title Loan Debt?
Credit cards can be a great way to consolidate your debt and get back on top of your financial situation. If you play your cards right, that is.
But for those looking for a quick and easy fix, it's not something you should simply rush into. Like any decision about securing your financial well-being, using credit cards to pay off your title loan debt deserves the proper research and careful cost-benefit analysis to weigh out the risks and rewards. It also requires the right card with the right rate and careful planning to ensure your debt is paid in full.
And with a little hard work and a budget that works for you (and not the other way around), you might even walk away with a higher credit score in the process!
So, is it possible or even worth it to use credit cards to pay off title loans? Here are some important facts as well as top 3 pros and cons to consider before you decide whether or not it’s the right call for you.
How Credit Cards Can Help You Pay Off Title Loans
When high-interest rates are holding you back, a 0% interest card could be your knight in shining armor. If you can transfer the amount owed from you high-interest loan onto you 0% interest card, you'll be saving big, and paying off your title loan faster than you ever thought possible.
Transferring the balance of your title loan onto your credit card means moving the debt from one place to another and taking advantage of the lower interest rate of your card. That means the original loan is no longer a factor in your finances, and you just have the card to worry about making those regular monthly payments. Many cards have 0% introductory rates, which could help seriously cut those payments down to size as long as you have the credit you need to swing it.
That might all sound well and good on paper, but there’s a bit more to it than just switching lenders. Here are two main ways you could use credit cards to pay off title loans.
Paying It Off with Your Credit Card
Does your lender accept credit payments? That’s the first thing you have to find out definitively before you proceed. Some loan companies will only allow cash or cash-backed payment (like debit, a check, a money order, or a direct transfer) because credit card companies charge vendors a fee for the transaction.
But if you can contact them online, by phone, or in person to ask about paying it off with a credit card, your credit card company will treat it as a purchase, which spares you the balance transfer fee. Contact your lender today and find out if you could save a bundle on interest by taking advantage of the lower rates your credit card provides.
Transferring the Balance onto Your Credit Card
Not all lenders will accept credit as payment, however. In that case, your best bet would be to initiate a formal transfer through your card company. You might be able to do it yourself online or even give the number on the back of the card a call for assistance. Once you provide the lender’s information, your card company handles the rest. You may also have been provided balance-transfer checks that you can use to get your balance transfer started.
Just remember to find out what the numbers look like before you get this process going. The amount to be repaid has to be within your card’s limits; for example, if you owe $8,000 total, and your card only has a $4,000 limit, you won’t be able to move the full balance. When it comes to choosing the right balance transfer credit card, it’s all about gauging your needs and how the tools you have at your disposal can help you meet and exceed them.
So, if your lender does accept your credit card as payment, or you are able to transfer that balance formally, what can you expect next? Before you throw that balance on your card, here are the top 3 risks and rewards to keep in mind.
Pros and Cons of Using Credit Cards to Pay Off Title Loans
As with all things in life, there’s good and the bad that come with moving your balance onto your credit card. If you don’t look before you leap, you could get slapped with a high transfer fee, saddled with higher interest for missing payments, and even damage your credit score. Here’s how:
You Could Get Charged High Transfer Fees
Credit cards are great for getting us where we need to be faster financially, but they’re also there to make credit card companies money. That’s where fees come in. Watch out for balance-transfer fees taking a bite out of your bottom line. They generally range between 3% to 5% of the amount, so if you’re transferring $10,000 in title loan debt, that’s $300 to $500 out of your pocket. If you’re planning on saving big on interest by paying your loan off faster, this could poke a hole in your debt repayment game plan.
You Could End Up Paying Higher Interest
But isn’t 0% interest a pro? Well, all good things come to an end. If you’re still holding onto that title loan debt when your 0% interest period ends, chances are that weight is going to get a lot heavier, and fast. You may even find yourself paying higher interest rates than you would have by just paying off the loan in the first place. It’s important to plot your plan of attack for repayment and account for a stumble or two along the way to avoid falling back into the same high-interest pitfall.
Life has a way of throwing you a curve ball when you least expect it, so even if you’re confident in your ability to repay and you’re a master of budget-fu, a financial emergency could still knock you off course. That's why it's important to hedge your bets by building a "rainy day" fund (usually enough to cover about 3 months of unemployment) and to always plan for worst while we hope for the best!
You Could Damage Your Credit Score
A healthy credit score is an important part of your financial well-being. And having a score that isn’t in the best shape can hold you back in more ways than one. To keep your score from straining, it’s advisable to use no more than 30% of your available credit. So, using all or most of it to cover your debt management needs could result in damage to your credit score if you aren’t careful. Worried about putting too much stress on your score? Ask your lender about using credit to pay your loan off faster over multiple payments.
While using credit cards to pay off title loans has its disadvantages, there are some serious advantages for the savvy borrower. For example, while using all of your new line of credit to pay off your title loan all at once might hurt your credit, breaking it up into payments over time could help you harness your good financial habits to boost your credit score rather than see it fall. Here are some other pros to consider if you want to use credit cards to pay off title loans.
You Could Take Advantage of an Interest-Free Period
Instead of focusing on what to do when the 0% interest period ends, you could focus on paying it off within that time. Making an aggressive payback schedule for yourself and taking on an extra job or source of income to kick that debt to the curb can get you there when saving and budgeting aren't enough. Just be sure to pay it back before the 0% period ends to dodge high APRs and you'll be set!
You Could Own Your Vehicle Outright
It's weird to think about, but for a lot of us, our cars aren't quite our own. You may drive it to work every day, but there are a number of reasons they are “less ours” than we’d like them to be. You may have a car loan, may have given the title to a lender to secure your loan, or it might just not be in our name. But wouldn’t it be nice if it were all yours?
The great thing about paying off your title loan is that, now, it can be! Title loans are secured loans, which means your car can get repossessed if it isn’t paid back. Even though you want to keep making your credit card payments to avoid a hit to your credit score, you won’t have to worry about losing your car due to a missed payment.
You Could Take Advantage of Credit Card Rewards
Last but certainly not least, using credit cards to pay off title loans could mean big rewards for you. Your monetary mindfulness could earn you points, miles, or cash back while you make your payments! Whether you’re a digital nomad, a foodie, or you’re just trying to feed a family of four, using your credit wisely could end up paying you back in spades!
Deciding Whether You Should Use Credit Cards to Pay Off Title Loans
When it comes to deciding whether or not to transfer your debt from a title loan to a credit card, always remember to do your homework. After reviewing the numbers, ask yourself: Do I know if my lender accepts credit as payment? Is the amount I save on fees and penalties worth the transfer fee? Do I have the discipline to make my payments within the 6 month or year-long introductory period?
If your answer to all of the above is a rousing “yes”, you may have found the answer to your title loan dilemma, but not without some serious planning! Take your time to make the right decision for your lending needs, and take the first step toward getting debt-free today.