Should I Pay Off My Car and Use it As Collateral to Pay Off Other Bills?

Many people need their cars to get to work and school, so it's usually unwise to risk losing a vehicle by using it as collateral for a loan. Furthermore, people who miss loan payments can end up deep in debt. They ultimately create more bills for themselves even though their original intention was to pay off bills.

Risks

Car title loans are also known as auto equity lines of credit. They allow people who have paid off their cars to use their vehicles as collateral to get loans for several hundred to several thousand dollars. Borrowers usually have up to 30 days to repay their loans. You shouldn't get a title loan unless you're certain you can repay the loan and the loan fees. You could lose your vehicle if you can't repay what you owe. Lenders usually require borrowers to turn over the titles to their vehicles and a duplicate set of keys to get title loans. Therefore, the lender has everything necessary to take a vehicle in exchange for an unpaid loan.

Costs

A 2011 "Virginian-Pilot" newspaper article notes how title loan borrowers may get caught up in a cycle of debt. The article titled "House OKs Bill Allowing Title Loans Outside Va." says critics of the loans highlight how debts may mount for title loan borrowers. In one case, critics asserted that a borrower made $7,000 in interest payments on a $2,500 title loan and owed another $7,000 due to high fees. You shouldn't get a title loan if it costs you more than the bills you're trying to pay in full. The interest rates on title loans may exceed 200 percent.

Interest Rates

Some people are attracted to title loans because they don't require a credit check. Yet a CNN article titled "Why Car Title Loans are a Bad Idea " says the loans have been criticized by consumers groups such as the Consumer Federation of America and the Center for Responsible Lending. The CNN article notes that even a high-interest credit card with a 25 percent interest rate is much less expensive than the typical title loan. Therefore, it likely won't benefit you to pay off bills with a title loan because it may come with an interest rate that's as much as eight times higher than the rates on other bills.

Considerations

Pay your bills on time even if you can't pay them off because late payments lower credit scores. You should avoid taking on a high-interest title loan just to be debt free as long as your bills are being paid on time. Get a second job or cut back on unnecessary expenses and use the extra money to pay down bills, especially if you're struggling to make monthly payments.