The Basics Behind Car Title Loans
By: manybanking.com Staff

If you are in need of quick cash, there is no shortage of high-interest loans available to you. Among these are car title loans, which offer immediate cash advances with your car title as collateral. Because the car title is used to secure the loan, no consideration is given to the credit worthiness of the borrower. Consequently, even those with the worst credit can qualify if they own a car.

Here’s how a car title loan works. You can typically borrow up 25% or 50% of your car’s value. To do so, you sign over the title of your car. Many of these lenders also require a copy of your car keys so that they can easily repossess your car if you do not pay off the loan. The loans are structured to be paid back at the end of a 30-day term, but borrowers often cannot afford to meet that deadline. As a result, these loans are usually rolled over month-to-month causing a cycle of debt that often leads to repossession.

Like payday loans and other cash advance loans you can find through storefront of online lenders, car title loans charge triple digit interest rates. If you thought your 18.99% credit card interest rate was high, how abut 300%? While car title loan lenders are required by law to tell you want the annual percentage rate is on the loan, that information may be buried in the paperwork. Instead, lenders focus on the monthly interest rate because the loan is supposed to be paid back in one month. If the loan says 20% interest, however, you know the APR is really 240%.

So how is it legal for them to charge such high interest rates? The lenders often work around state usury laws and small loan rate caps. Only a few states have restrictions on these high interest rates and online lenders can export loans to consumers in less restrictive states. The lenders who do charge lower rates often offset the difference with high fees. Fees can be charged for processing, document preparation, late payment, origination and liens. These fees can add up to between $80 and $115.

Car title loans target low-income borrowers who do not have many other options for quick financing, and they are often considered to be predatory in nature. One example of how these loans are exploitative is the interest-only option. A borrower might take out a loan for $3,000 and opt to only pay interest for a set number of months (if the loan is set up for longer then 30 days). At 15% interest/month, the monthly payment would be $450. If the borrower only paid interest for 6 months that would be a total of $2,700, after which point the $3,000 principal balance would still remain. If the borrower could not make a balloon payment for the principal, the loan would be rolled over and the cycle would continue.

If you are cash-strapped, there are better alternatives to car title loans. You may be able to get a temporary loan at a lower rate from a credit union, for example. Alternatively, a cash advance from a credit card will carry a much lower interest rate than a car title loan. There are also community assistance programs that offer loans and grants in emergency situations.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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