What Are Car Title Loans?

You may have noticed businesses that offer title loans, or at least you’ve seen or heard advertising for them. Some of these businesses not only offer title loans, but also check cashing and pawn loans.  These are what I called “2nd tier” loan options, and they are becoming more popular than ever.  Here’s the low down on these options…

Title loans

What are title loans? Car title loans use your car as collateral for a loan, but you must own your car free and clear.  You hand over the car title and extra set of keys, and if you don’t pay, they can take your car.  Since there is no credit check, only income verification, those with poor credit are more prone to get these loans.

High interest rates

Title loans are marketed as emergency loans, similar to payday loans. They are usually for 30 days with amounts usually ranging from $300 to $2,500. The interest rates can be 30 percent a month, which is 360 percent annually. The lender usually lets you borrow up to 50 percent of the car value, which is substantially lower than its value.  The borrower signs loan papers, with the terms which include the car as collateral.

At the end of thirty days, the lump sum payment is due.  If the loan isn’t paid off in one month, the loan can be extended or rolled over for another month at an additional fee, and another month’s worth of interest is added on.  It is not unusual for the loan to be rolled over, some states allow up to four roll overs.  If the loan is not paid, the lender can take the car, sell it and keep the money.   In most cases, the sale amount of the car is more than is owed, but the difference is not refunded to the borrower.

Example

For example, you take out a loan for $1,000, the origination fee is $15.00 and the interest rate is 30 percent.  At the end of the first month, you owe $300 in interest.  If you roll it over another two months, you owe an additional $600 in interest.  The total interest owed is $900 plus the $15 fee or $915, which is almost equal to the original loan amount of $1,000.  You have just about doubled the loan, which is now $1,915.

Over half of the states have passed laws to prohibit extremely high interest rates and some have set high caps on them.  I don’t recommend title loans; you are risking your car, if you can’t pay the loan.  In addition, the interest rates are outrageously high.  Stay away from car title loans.

Credit Damage Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

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