All loans are at risk if not paid on time. But a car credit loan has a particularly disturbing consequence if you default on your repayments: the lender can take your vehicle.
Before you consider getting a home loan, consider the potential downsides of using your vehicle as collateral for your loan.
What is a title loan?
A car title loans allows you to borrow any amount from 25% to 50% of the value of your vehicle to provide the lender with your vehicle title as collateral. The term of these short-term loans is usually 15 to 30 days. In many cases, you must own your car outright to get a loan. Some lenders offer this type of loan when your vehicle is almost paid off, but this is less common.
Here’s how it works: Say you own a $5,000 car and you’re in a state of emergency and need $1,000. A title loan allows you to mortgage your vehicle so you can get $1,000 fast. Just as a mortgage loan uses your home as collateral, a title loan uses your vehicle as collateral.
“One of the most important things people need to know about a title loan is that it uses the assets in your vehicle to secure the money you’re going to borrow,” said Bruce McClary, vice president of communications at the National Credit Foundation for Mentoring.
While the word “automobile” may be included in the product name, these points may also apply to motorcycles, boats and recreational vehicles.
In order to regain ownership of your vehicle, the loan must be paid in full, including the high fees the lender charges to fund it.
How does a title loan work?
There are different types of car title loans. Some are single-payment loans, which means the borrower must pay the full loan plus interest charges in about a month. Installment loans with similarly high APRs can be repaid in three to six months, depending on the lender.
The fees associated with auto title loans are not cheap. They typically include an average monthly financing fee of 25%, which equates to an APR of up to 300%. For a $1,000 loan, you will pay an additional $250 in interest if the loan is repaid within 30 days. If you default on your payments and these interest charges pile up, the loan could end up costing much more than the original list price.
Title loans often incur hundreds of dollars in additional fees, as well as processing, documentation, and loan origination fees. In some cases, you may also need to purchase and pay for a roadside assistance program for your vehicle. When applying for a car title loan, be prepared to provide the lender with clear title, proof of insurance, and photo ID. Some lenders require a second set of keys.
Graciela Aponte-Diaz, director of federal activities at the Center for Responsible Lending, said that while getting a title loan may be easy, the convenience comes with significant costs and risks.
“Some car title loans install a GPS device — nicknamed a ‘kill switch’ — that prevents the borrower’s car from starting and uses the practice as a way to collect debt or make the car easier to seize,” Aponte said. a means.” – Diaz. “Not only is the car the most important means of transportation to work, to the doctor or elsewhere, it’s often the biggest financial asset a person owns. To put it mildly, the looming threat of losing a car is dire.”
Disadvantages of title loans
The biggest downsides of title loans are the short repayment period, high interest rates, and the possibility of losing your car if you default.
“These are usually short-term loans with very short repayment periods,” McClary said. “If you can’t repay the loan when it comes due, it goes into another cycle with higher fees. It creates a very difficult situation for people who are already struggling with repayments. It’s a debt cycle. Precisely defined.”
However, the main disadvantage is the possibility of losing your car. If you can’t repay the loan, the lender can take your vehicle. In 2016, a study by the Consumer Financial Protection Bureau found that 20 percent of those who took out title loans had their vehicles impounded.
Some lenders even require you to have a Global Positioning System (GPS) in your vehicle and a start-stop device when you get a loan. This step allows the lender to locate the vehicle and disable its ignition system remotely if you fail to repay the loan and they decide to repossess your vehicle. The lender can then sell the vehicle to get their money back.
Alternatives to title loans
Faced with such serious headwinds, McClary recommends turning to traditional banks and credit unions for low-cost borrowing options.
“Many people shun traditional lenders based on assumptions about their creditworthiness,” he said. “It’s the most dangerous thing you can do. You lied about the money you might have saved.”
Even if you don’t have a bank account, have a low credit score, or have struggled with poor financial decisions in the past, it’s worth exploring all the alternatives. “It’s interesting to see how flexible these traditional lenders are,” McClary said. “There are many credit unions willing to work with unbanked customers.”
McClary rarely recommends increasing credit card debt, but says it’s a better option than title loans. In most cases, the interest on a credit card is much lower than the interest you end up paying on a title loan.
If you decide that a car title loan is your only option, make sure you understand the loan terms. Title lenders must provide you with the terms of the loan in writing before signing, and federal law requires them to be honest and open about the total cost of the loan. Remember – the cost is likely not worth the risk involved.
“Auto title loans often lead people to go into debt and lose their cars,” Aponte-Diaz said. “Auto title lenders often make people look worse than they were before they borrowed.”