Why car title loans are a bad idea
(AOL Autos) — Cash advances are not a new concept in American capitalism. Many people saw the ads with a guy barking, “Bad credit, no credit, no problem!” Or, “Don’t worry about credit, I own the bank!”
In addition to high interest rates, these car title loans usually include a number of fees that add up quickly.
Every time a guy tells you he owns the bank, run.
Even though these lenders have been around for a while, signing your car for a high interest loan has become a serious financial problem.
For those of you unfamiliar with the concept of car title loans, allow us to explain.
Sometimes the best of us run out of money; we may have no credit or have bad credit (as they say in advertisements), which prevents us from obtaining small loans from a bank or other more traditional means.
A title loan offers you money from the lender, in return you sign the title of your paid car to secure the loan. Typically, these loans must be repaid in full 30 days later. There is no credit check and only minimal income verification.
It sounds simple enough, but borrowing from these places can lead to repossession of your car and a lot of financial problems.
Interest rate youhat to make the credit card companies blush
Car title loans have been lumped into the category of “predatory loans” by many consumers. Non-profit organizations such as the Consumer Federation of America (CFA) and the Center for Responsible Lending have published detailed reports outlining some of the title lending issues the public should be wary of.
One of the biggest issues with these loans is the interest rate. Many people don’t like credit card interest rates, which average mid to high teens for most Americans. Car title loan interest rates make complaining about credit rates seem ridiculous.
Car title lenders are in a different class than credit card companies or banks and circumvent usury laws. Thus, title lenders are able to charge three-digit annual percentage rates (APR). Yes, three digits. It’s no exaggeration to see 250% APR and more on these car tile loans and only a few states have strict laws that prohibit exorbitant percentage rates.
Even if your credit card company charges you a high interest rate of 25% APR, that’s nothing compared to car title loans. AOL Autos: the most popular used cars
By federal law, securities lenders must disclose interest rates in terms of an annual percentage. If you need to get a title loan, make sure they don’t just give you a quote of the monthly percentage rate, they have to give it to you in the form of an APR. If they aren’t clear on pricing, which many may be, just know that a monthly rate of 25% equals an APR of 300%.
Interest-only fees and payments
In addition to high interest rates, these car title loans usually include a number of fees that add up quickly. These include processing fees, document fees, late fees, set-up fees, and lien fees. AOL Autos: the safest cars
Sometimes there is also a roadside assistance program which borrowers can purchase for an additional small fee. Some lenders have even gone so far as to make roadside assistance mandatory. The cost of all these fees can range from $80 to $115, even for a $500 loan.
Most of these fees are legal, except for one that lenders sometimes charge, the repossession fee. Lenders aren’t allowed to charge you to repossess your vehicle, but some do. AOL Autos: The best minivans
As if high interest rates and a mountain of fees weren’t enough, lenders also offer borrowers the option of paying interest only for a set period of time. In these cases, the loans are usually set up for a longer period of time (compared to the typical 30 days) and the borrower can only pay the interest on the loan.
These types of payments are called “lump sum payments” where the borrower pays the loan interest each month and at the end of the term still owes the full amount of the loan.
The CFA reported that a woman paid $400 a month for seven months on an interest-only payment term for a $3,000 loan. After paying $2,800 in interest, she still owed the original $3,000 in the eighth month. AOL Autos: the most popular crossover vehicles
Rollover and Repossession
If you think most people who take out these loans pay them back in full after a month, think again. Due to high interest rates and the fact that these lenders cater to low-income borrowers, many people are unable to repay their loans within the 30-day period. This is called “rolling over” the loan.
The terms of these loans are designed to keep borrowers in a cycle of indebtedness and bring clients either to the brink of repossession or actual repossession. Not being able to repay the original loan and renew it the following month costs borrowers even more money in interest, on top of the original amount they have already borrowed. AOL Autos: Used Luxury Cars
Let’s talk about repossession for a minute. The CFA reported that, of those surveyed in its 2004 study, 75% were required to give title lenders a copy of their car keys. Some companies started the cars to see if they were working and took pictures of the vehicle before a customer even filled out the loan application.
An Arizona-based company said it has installed GPS systems on cars so it can track cars and shut them down remotely if they don’t receive payment on time. This may be an extreme case, but these lenders take a client’s signature very seriously. If you can’t pay, they will pick you and your car up.
The concerns about repossessing your car are obvious. How do you get to work, drop the kids off at school, go shopping or go out on weekends without a car? As if these scenarios weren’t enough, owning a car can be some people’s biggest financial asset. If the car is taken away, the money it was worth is gone too.
Some states have laws that require lenders to pay you the loan difference once a lender has repossessed and sold your car, but some don’t. It’s possible to default on the loan and not get any money back for your car, even if you only borrowed a few hundred dollars.
This happens because car title loans are also over-secured. Typically, the maximum amount most lenders will give you is 25-50% of the actual value of your car. However, if you can’t repay the loan, they may be able to sell your car and keep 100% of the profits. Some lenders will not take possession of a vehicle but will instead sue the customer for the money. They then add legal fees and finance charges on top of the existing loan amount.
Many car title lenders defend their business practices by saying they offer loans to people who otherwise could not get financial help. While that may be partly true, selling one of your most valuable assets for several hundred dollars isn’t the only option.
Some credit unions, such as in North Carolina, have started providing low-interest loans of around 12% APR, a fixed 31-day repayment plan (to avoid deferring a loan) and set up a direct deposit to the borrower’s paycheque. so that the loans are fully repaid.
Other options may be payday cash advances from your employer, credit card cash advances, emergency community assistance, small consumer loans, or borrowing from friends or family members. family.
If you are considering a car title loan, check out these alternative options and read the information for yourself at www.responsiblelending.org or www.consumerfed.org. If you still need to sell your car for cash, educate yourself on the decision and know the possible repercussions of these types of loans.
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