Why You Should Avoid Car Title Loans
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UPDATED: Dec 5, 2011
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Imagine a borrower who is overburdened with bills, has horrible credit, no savings, and no property. Without any collateral, and a poor financial history, traditional lenders will show him the door long before negotiating terms on a loan. But then imagine this money-strained individual sees a commercial that’s reciting lines such as, “No credit, no problem,” and, “Have a car? Then you have money.”
Struggling people reach out to help wherever it comes from—particularly when a helpful hand proves to be a rare occurrence. When banks, credit unions, and other traditional means of acquiring money fail an individual, they turn to those who will. In this case, it’s a predatory business offering car title loans.
What are Car Title Loans?
Car title loans are a form of financing that offers money to borrowers willing to put their vehicle up as collateral. Because those who have good credit, savings, or adequate collateral have other means of acquiring money in tight situations, car title lenders typically appeal to those with next to nothing. Consequently, these lenders have received a lot of public scrutiny.
The resounding problem with car title loans is with the way they’re structured. This form of financing is structured with high interest and backed by one of the very few possessions the demographic they appeal to have: their car.
“Due to the high interest rates, short payback window, and in many cases, the lender’s ability to repossess a car after just one missed payment, those in need of quick cash are at high risk of losing their vehicles and getting caught in an ongoing cycle of debt… In this unregulated business, there are scant protections for consumers and no provisions to protect,” explains an article from The Daily Press, a Virginia-based newspaper that covers the happenings in various military installments.
When a borrower defaults (and default is exactly what these companies hope for), the borrower’s car is repossessed, leaving them without any means of reliable travel or transportation to a job.
Even after repossession, and after their cars are sold, borrowers can still wind up owing money to repay the debt from these loans.
A car title loan survey done by the Consumer Federation of America (CFA) shows the median annual rate charged by title loan stores is 300 percent. Online title lenders have rates up to 651 percent. On top of these extraordinarily high interest rates, these loans are structured to conclude with a large balloon payment.
Once that balloon payment comes, and a borrower’s unable to pay it, his car may be subject to immediate repossession.
One particular company goes so far as to attach mechanisms on all borrowers’ cars. When default occurs, the company can remotely shut borrowers’ cars down—wherever they may be—leaving them stranded in place until the company comes for the vehicle.
And the rate of repossession is no laughing matter: according to the survey, one particular Kansas-based title company repossesses around 10 percent of all its borrowers’ vehicles.
A Better Alternative
Borrowers who do not qualify for traditional loans but are insisting on taking money out should consider payday loans before a car title loan. While payday loans have annual percentage rates on par with car title loans, payday lenders do not require vehicles to back their loans.
But the decision to take a payday loan out should not be taken lightly. They come with debt traps of their own, though not nearly as severe as vehicle shutdown and repossession.
Consumers need to be wary of rolling payday loans over time and time again. If confident they can repay a payday loan in one or two terms, then consumers will not be at much risk at all when taking one of these better-alternative loans out.