If you own a free, cleared car, but need some quick cash, you might be looking into a title loan. It could be the first step on a slippery slope – one that you should avoid. Here we discuss how dangerous these loans are and why.
How securities lending works
Auto title loans are a type of secured loan that uses the title of your vehicle as collateral. This means that if you do not repay the loan as agreed, the lender has the right to repossess your car. These loans typically range from $ 100 to $ 1,000, and you have to pay them back either within 30 days in one installment or in installments, usually in renewals ranging from three to six months.
According to a 2016 Consumer Finance Protection Bureau study, one in five borrowers repossess their vehicle as a result of these loans. In addition, more often than not, borrowers cannot afford to pay off their loans in one installment, so they end up renewing their loan seven or more times in a row, leaving them trapped in a cycle of indebtedness that can last. the best part of a year or more.
Auto title loans, as well as payday advance loans and pawn shops, are generally regarded as predatory types of loans. Due to the incredibly high interest rates that come with title loans – an average APR on an auto title loan is 300 percent – people often struggle to pay off in full on time.
With a typical interest rate of 25% per month, a $ 1,000 loan costs you $ 1,250 to repay. When a consumer cannot honor that payment within 30 days, lenders usually allow you to “roll over” your loan. This is where people get trapped in the debt cycle. If you pay $ 250 and renew your original loan amount, resulting in additional fees and interest, you still owe $ 1,250 or more in 30 days.
There are other factors that make these loans unsafe, like add-ons, which can increase the cost. Additions such as roadside assistance, credit report fees, and origination fees not only increase the cost of a title loan, but may be required instead of optional. Knowing this, if you absolutely must get a title loan, it is a very good idea to shop around before signing any documents.
Car title lenders are required by truth in lending law to give you full written loan terms. You should also make sure you know your credit score and what is on your credit reports, and that you have fully covered auto insurance before signing up for an auto title loan.
Before getting an auto title loan for bad credit …
You want to make sure that you consider all of your options before considering a title loan. Not only can your vehicle be repossessed, there are a number of other consequences as well.
For example, your auto insurance company may decide to pay the lien holder directly if you are involved in an accident and your car is considered a total loss. In some states, securities lending companies are required to pay you the difference between the value of the vehicle and the loan balance. But, in other states, they are allowed to keep payment in full from your insurance company.
Also, since you are putting your title up as collateral, if something happens to your car, such as theft or total destruction, you will not be able to obtain financing for a replacement until you have paid off your loan. title – especially if you have bad credit.
Before signing on the dotted line for a high interest auto title loan, consider these alternatives if you have bad credit:
- Contact your creditors to communicate your situation and see if they can work with you
- Ask friends or family for money to help you
- Take out a small personal loan from a credit union or bank
- Consult organizations that help with living expenses
- Consider a cash advance by credit card or ask your employer
- Borrow from your 401 (k) retirement account
As you can see, there are other options to consider. However, some of them also carry higher than average interest rates, such as credit card cash advances. Other options, such as borrowing from your retirement account or 401 (k), should be done with extreme caution and consideration.
As we see
You should always be aware of all the options available to you if you need financial assistance. But you should also be careful because not all lender options are as good as they look. Here has Auto Express CreditWe recommend that you always do your research before embarking on any type of auto loan, especially an auto title loan.