Fast Money, but What a Price to Pay
Auto title loans represent a fast cash option for the debtor. These short term loans are based on the value of your car. To get one you need to own your auto outright, free from any liens.
You give the lender your title to secure the loan and you continue to drive your car. Usually the loan amounts are in the $250 to $1500 range, but depending on the value of your car the amount may be as high as $10,000.
Loan repayment can be worked out in a number of ways. Here are two of the most common: First, the loan is made for 30 days. You need to repay the amount you borrow plus the interest in 30 days. If you are unable to pay the full amount, you usually can roll over the loan by paying only the interest. Then you have a new note to pay in another 30 days.
Usually they will roll it over again and again. Auto title loan companies want to make as much money as possible from you. Eventually you need to repay the loan. In the mean time they will gladly take your interest payments.
The other variation is to take out a loan for several months with interest paid monthly. Then a balloon payment for the amount borrowed is due at the end of the loan term. An example: An auto title loan is made for $2500. The borrower must make payments of $400 a month (200% per year) and then pay the $2500 in a balloon payment in 7 or 8 months.
Can They Be Useful?
Auto title loans can serve a purpose. You need to extraordinarily careful how you use them. The only way to use them to your advantage is if the money you receive from the loan will save you some other fees you would have to pay. For example, if you are going to bounce some checks or get hit with some late fees on other types of accounts. Another thing to think about, is any negative entries on your credit report for payments missed, can be avoided.
Two things you need to consider. One, the fees for the auto title loan should be less than the money you will have to pay out otherwise. Two, make sure you can pay the loan back when it comes due. You do not want to roll over these loans.
Where Is The Downside?
So, fast cash, easy to obtain, where is the downside? Let’s talk interest. Most interest rates for these types of loans fall between 200 and 300 percent per year. When you first begin it doesn’t seem so bad because of the way the auto title loans are presented.
The interest is represented as a monthly amount, because you only need the money for a month. “Look, we only charge $25 for a $100 dollar loan.” You figure it is only for a month, then you pay it off and down the road you go. These loans are almost never paid off in the first month. Most borrowers who actually repay the principal amount take 8 to 10 months to do it, if ever.
Now let’s talk about your car. The sad fact is most people who enter into these loans will lose their car. If one payment is missed or if at the end of your loan term, you are unable to make the balloon payment chances are very good you are going to have turn over your car to the loan company.
They will take and sell your car regardless of what you owe. You will lose all equity in your auto if you default on the loan. This is a huge risk for you to take for such a small amount of money.
Fulfilling A Need
Auto title loan companies say they are only fulfilling a need in the marketplace. It seems that need is to have your car.
I have found that regardless of the warnings issued, many are still dead set on doing this. All that can be said is, throughly research your choice before signing the dotted line.