Understanding Title Loans and Why You Should Avoid Them
You have probably heard of title loans but may not understand them. How do they work? Are they a safe financial option? Are they the best choice for you?
A car title loan is a collateral loan where the borrower uses his car or truck to secure the loan. The car will have a charge placed against it, while the borrower will surrender a hard copy of the title to the lender. A copy of the car key is also necessary. When the loan is repaid, the keys and the title will b given back to the borrower and well as the lien being released. If the borrower defaults on the loan payment, the car will be repossessed. A car title loan is one of the latest methods of high cost and small lending means that are rampant in our country today.
Why are Title Loans a Bad Idea?
Title loans are short-term loans that carry a higher interest rate than a traditional loan. The (Annual Percentage Rate) APR is often over 100%, or even higher. The lender does not usually check the credit history of the borrower but will look at the value and condition of the car in deciding how much to loan.
Many borrowers find it difficult paying back the loan because they are in financial trouble to begin with or were not in the position in the first place to take out the loan. This makes it even riskier for the lender.
According to a statement issued by the Consumer Federation of America and The Center for Responsible Lending, “This is often not the best way to purchase a vehicle or borrow money for any reason. Those who borrow in this way will sometimes find themselves borrowing more, or rolling the loan to decrease a payment while paying incredible sums in interest so that you find it nearly impossible to pay the loan off, or in fact, even to touch the principal of the loan.” Moreover, in many cases, the moneylender will repossess the vehicle after you have made some large payments, taking away your most valuable possession in some cases and in most cases, also taking away your only method of transportation to and from your job.
To receive a title loan, you must sign your title over to a vehicle, which is currently entirely paid for, and in many cases, must supply the lender with your spare set of keys so that they may take the care without difficulty if they believe they need to do so. Usually, the loan is due within just a month or so and must be paid off in a lump sum, which often makes it difficult for the borrower to accomplish paying off the loan.
The value of your car is typically a great deal more than the lender will lend you for it and therefore, if they do sell your vehicle, the lender of your loan makes a relatively tidy sum from its sale-in some states, being permitted to keep that amount as well. In other words, when you sign the title over on the short term loan you got using your car as collateral, the loan company makes a reasonable sum of money should you pay it and a great deal more if you default.
In many states, loopholes of one variety or another are used to prevent the lender from being guilty of usury and to keep you from being able to get your day in court once the loan has defaulted. In most cases, you have no legal means of recouping your car of the excess funding for which it is sold. This is not to say that it is in their best interests if you do default, but you can do the math.
Wrapping things up, the best way to borrow money is not a car title loan, even on a temporary basis, unless you are really in a very dire emergency. While the process of obtaining title loans is a fast and easy one, one can end up paying for that loan in spades, and except for in an emergency, a title loan is not worth the huge expense you will pay for the convenience of that loan.