All loans come with risks if they’re not repaid on time

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However, a car title loan carries an especially troubling consequence if you fail to meet your payment obligations: The lender can take your vehicle.

Before you consider getting a title loan, consider the potential potholes you’ll hit if you use your vehicle as collateral to borrow money.

What is a title loan?

A car title loan is a short-term loan that lets you secure a small amount of money in exchange for giving the lender the title to your vehicle. You’ll also pay a sizable fee to borrow the money.

Let’s say you own a car worth $5,000, and you find yourself in an emergency situation that requires $1,000. A title loan lets you borrow against your vehicle, so you can get that $1,000 quickly. Just as a mortgage is backed by your home, a title loan uses your vehicle as collateral.

“One of the main pieces of information that people need to understand about a title loan is that it uses the equity in your vehicle for collateralizing the money you will borrow,” says Bruce McClary, vice president of communications at the National Foundation for Credit Counseling.

In most cases, you need to own your vehicle outright to qualify for a car title loan. The term “car” e, but these loans also can be available for motorcycles, boats and recreational vehicles.

While some lenders will offer loans if a car is still being paid off, most require the owner to hold the title with no debts attached to the vehicle. Consumers typically can borrow between 25 and 50 percent of the car’s value.

How do title loans work?

Car title loans come in a couple different varieties. Some are single-payment loans, meaning the borrower has to pay the full amount of the loan plus the interest rate fee within a month or so. Installment loans, with similarly high APRs, can be paid back over three or six months, depending on the lender.

When applying for a car title loan, prepare to show the lender a clear title, proof of insurance and a photo ID. Some lenders ask for a second set of keys.

While getting a title loan may be easy, the convenience comes with serious costs and risks, according to Graciela Aponte-Diaz, director of federal campaigns at the Center for Responsible Lending.

“Some car title lenders install a GPS device – nicknamed a ‘kill switch’ – that can prevent the borrower’s car from starting, using this practice as a means of collecting a debt or making it easier to seize the car,” Aponte-Diaz says. “In addition to being (the) primary means of transportation to work, the doctor and elsewhere, a car is often the largest financial asset that a person has. The looming threat of losing your car is anxiety-inducing to put it mildly.”