Car title loans are a form of predatory lending very similar to payday loans where your car title is used as collateral for a high interest loan.
Many of you have probably heard of Payday loans and the danger they pose to your financial well-being. Many refer to Payday loans as “predatory lenders” and for good reason. They feed off desperation and take advantage of people who feel they have no one to turn to for help. Payday loans, however, aren’t the only predatory financing scheme consumers need to be aware of.
Car title loans are another form of short-term, high-interest loan targeted towards the desperate. Car title lenders offer “services” almost identical to those of Payday lenders with an interesting twist – your car is used as collateral. For many families, their car is the most valuable asset, losing it could mean disaster.
How Car Title Loans Work
After you’ve signed paperwork making the loan official, you hand the lender your car title and a set of keys to your car. You get a loan for approximately half the wholesale value of your car. Sound OK so far? Now you’re obligated to pay back the loan plus interest. This is where things get interesting (no pun intended!) Now you have to pay back the loan plus ridiculous annual interest (often 300%!) and probably a loan processing fee of some kind. If that sounds bad enough just hold your horses, it gets worse.
If you take someone up on a car title loan, you’ll be required to pay it back within a month or two. Fall behind, I mean miss a single payment, and you might lose your car. No one keeps track of how many car title borrowers lose their vehicles because car title loans are unregulated in several states. That makes it hard to determine just how many consumers lose their cars because of these loans.
Do the Math
It’s important to understand how much these loans really cost. A $1000 loan could cost you several times the principal in a short period of time. Your payments could be as much as $250 a month and $200 of that would be interest! In some cases, a borrower is only required to make small payments on the interest alone. The rest will be due in the form of a balloon payment at the end of the loan’s term. Don’t worry, if you can’t make the payment, you’ll be offered the chance to roll the remaining balance into a new loan. Luckily, there are limits on how many times a loan can be rolled over. Once you’re reached that limit, someone’s going to want to be paid.
What happens to the cars?
If you miss a payment, the car title lender will waste no time repossessing your vehicle. Once in the lender’s hands, the car will be cleaned up and auctioned off. You’ll never see your car again. If you’ve seen advertisements for auto auctions and wondered where the cars came from, you can bet some of them were the result of bad car title loans.
These loans are designed to lure the desperate into making a bad decision. Taking out one of these loans could very well mean you’ll lose your car. This type of loan shouldn’t be an option for anyone. If you need the money that badly, you’re better off selling your car than giving it away to someone.