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Understanding Car-Title Loans

Your friend tells you about this new way to get a loan called car title loans and you are curious as to how they work. Similar to the subprime mortgage loans made at the height of the mortgage bubble, car-title lenders make asset-based loans without evaluating whether the borrower can repay the loan. The decision is made instead on the value of the collateral--in this case, the car. Typically there's no credit check, nor does the lender ask about other monthly expenses or debts. Sounds like a good idea, right? Well, maybe not such a great idea because if the borrower can't make the payment, there are two choices: Get another loan, or lose the car to repossession.

Car-title loans have ballooned into a $6 billion dollar industry over the past decade, with $4 billion coming directly from borrowers in the form of exorbitant fees. Twenty-one states still permit this debt-trap, which puts one of consumers' most significant assets on the line (Center for Responsible Lending).

Many borrowers end up in a cycle of debt. One recent study estimates that borrowers who take out the typical nine title loans in a year wind up paying back more than three times the amount borrowed--$3,391 in payments for a $1,042 loan.
The Washington Post reports that, in Virginia, car-title loans in 2012 were up about 26% from 2011, and 20% of borrowers failed to make a monthly payment on a title loan for at least 60 days.
The Center for Responsible Lending cites several borrower stories, one involving a retiree who depleted his life savings to pay for his wife's cancer treatments; he then took out a 375% Annual Percentage Rate (APR) title loan on his pickup truck. His fixed income only covered the title-loan fees, not the principal. He ultimately retired the debt by taking out a loan at 16% APR through a credit union.
Keep these tips in mind before giving away your vehicle:

  • Zone in on the APR. Car-title loan rates range from 84% to 300% and higher. Focusing only on that "small and easy" initial fee traps many people into an endless cycle of debt
  •  Shop around. Ask at the credit union what other options are available for your situation.
  •  Steer clear of all predatory loans. That includes refund anticipation loans and overdraft loans. Ask about credit union alternatives to expensive loans offered by payday lenders.
  •  Boost your rainy day account. Consider automatic transfers from checking to a liquid savings account for greater peace of mind.

Published 09-23-2013


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