Are car title loans a bad idea?
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UPDATED: Jun 27, 2012
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A car title loan is a type of financing wherein borrowers offer their car as collateral in exchange for money. These loans usually require no credit check and their applications are quickly processed.
Car title loans are often used as cash advances since their average term is only 30 days. Similar to payday loans, terms can be extended but this can lead to a cycle of debt with the looming threat of repossession.
While the amount borrowers can obtain varies, lenders will rarely agree to lend more than 50 percent of the securing car’s value.
In order to qualify for this loan a borrower must own a car outright. The car will be inspected by the lender and a short application will be processed before any money is lent. Borrowers should be prepared for car title loan lenders to require GPS tracking and car key copies.
Car title loans are not low cost forms of lending. Like payday loans, car title loans usually have higher interest rates than credit cards. They also feature a large number of fees, such as processing fees, document fees, late fees, origination fees and lien fees. Some lenders even feature repossession fees charged for the seizure of the automobile should a borrower default.
This type of auto loan can leave borrowers vulnerable to repossession. If the car is repossessed, borrowers will not only be without a mode of transportation, but they will have given up their car in return for only a fraction of its true value.
Car title lending gives borrowers the option of interest-only payments for a set period of time. These cases usually still have for a term of 30 days, during which the borrower is only responsible for the interest on the loan. In practice, this makes auto title loans easy to pay until the term ends. At that point, the lender will demand the remaining balance on the loan to be paid in full.
This practice is almost identical to how “balloon loans” work, where borrowers make regular payments on a loan, but, at the end of a balloon loan’s term, the borrower must pay the full remaining balance of the loan in one lump payment. If a borrower fails to pay at the end of the term, the loan may rollover causing a cycle of debt by forcing the borrower to fork over additional renewal fees. Or, worse, the collateralized vehicle may be repossessed.
Car title lending is best reserved for borrowers who can either save money or obtain the necessary amount of money to pay off their loans once the terms conclude.
Thousands of borrowers are able to make plans to repay the amount they financed and even build their credit. Car title loans can be great tools for people who are in a rare emergency situation and know they will have the money to pay their financing off by the time the terms end.
Fortunately, there are free online tools for finding out if an auto title loan is a right choice. With these tools, prospective borrowers can even see their loan quote prior to speaking with auto title lenders.