Facts About Car Title Loans
A car title loan is a secured loan based on a percentage of the value of your car; the car is used as security for the loan. Usually the loan requires upfront fees. The borrower signs over her title to the lending company until the loan is repaid, high rates and fees included. These loans are similar in structure to a payday type loan---a loan with high rates and fees that are often sought out by desperate consumers.
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Rates
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According to the Consumer Federation of America, auto title lenders can charge borrowers 300 percent in annual interest for title loans. The industry average interest rate for a car title loan is 25 percent per month of the amount borrowed. Rate information is misleading to many borrowers before they borrow. Lenders may refuse to discuss the rate or might show the rate as part of miscellaneous fees, such as an extended insurance policy on the vehicle. CNN reports that auto title loans are not regulated.
Vehicle Values and Fees
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Some lenders require interest charges up front, according to the LegalExplorer website. Loan amounts are based on a percentage of a vehicle's value, such as 55 percent. The lender may also tack on fees, such as $62.50 to $181 per month for a $500 loan, according to Consumer Federation of America. Auto tile loan lenders also require a copy of the keys at the time of the loan. Some lenders do not require the upfront fees; instead the fee is due at the end of the loan. This makes it very hard for someone experiencing financial difficulty to repay the loan and get his car back.
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Inability to Pay
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Inability to pay the loan back within 30 days can prove to be quite expensive. Some borrowers are forced to extend the loan payback period another 30 days, resulting in additional fees and more interest. A loan at an interest rate of 25 percent now doubles to 50 percent. LegalExplorer reports that even if the auto is repossessed, the company can sue the borrower for the fees and interest still due to the lending company. CNN warns that if you borrow only a few hundred dollars for an auto title loan and default, you can still have your car repossessed and not see any return for the profit that the lender made when it sold your vehicle.
Statistics
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Consumer Federation of America describes the auto title loan business as "predatory." Auto title loans target people with little money while loans are expensive and high-risk. Some states are unregulated, in which case, loans for as high as $2,500 are legally required to be paid in full within 30 days. Many states have loopholes in the system, and auto loan title lenders take full advantage.
Other Options
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Many sources urge consumers to consider other options. LegalExplorer suggests looking to your community for help. Utility, health, car, children's services, clothing, food and veterinary help may be available. CNN suggests checking with local credit unions. Some banks may lend a small amount of money with a 12 percent interest paid back within 31 days with the setup of direct deposit.
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References
- Photo Credit Headlight on new car image by steven Husk from Fotolia.com
