banktime.com

Even if you aren’t really paying attention, you’ve definitely heard the ads. “You’re okay with us!” “Bad credit? No credit? No problem!” These people are offering you quick cash, which, on first glance, sounds like a great thing. Of course, there’s a catch. If someone’s hawking cash on the radio, you can guess that it’s definitely too good to be true. Invariably, these advertisements are either for payday loans or their less commonly-known cousin, title loans. Payday loans are a concept that many Americans know about: you go to a payday loan store, write a post-dated check, collect your cash, and pay back the short-term loan on your next payday (hence the name). Payday loans get a bad rap – and deservedly so – but they look downright innocent compared to title loans.

A car title loan is one that is secured by… you guessed it!… the title to your (paid for, non-financed and non-leased) car. If you are hard up on funds and need cash for some urgent reason, your credit sucks, and you don’t have a family member willing and able to help you out, then you might go looking for a place to turn. A car title lender will give you the cash you need, in exchange for the title to your car as a security measure. The loan is generally extended to you for thirty days. If you can’t pay up at the end of the month, you can kiss your wheels goodbye.

You might be saying, “but… but… I can pay the money back!” Sure you can! Just don’t forget to tack on twenty-five percent interest and a slew of other fees that may not be disclosed until you are ready to sign on the dotted line. An interest rate of twenty-five percent amounts to two hundred fifty percent on an annualized basis, and this is not at all uncommon in car title loan circles. Many consumer interest groups, like the Center for Responsible Lending (CRL) and the Consumer Federation of America (CFA) have condemned these types of lenders, classifying them as a type of predatory lending to avoid. Only a small amount of U.S. states have disallowed lenders from charging whatever interest rates they deem fit. And, as I mentioned, you can expect to be slammed with a host of fees – document fees, processing fees, lien fees, origination fees… and, if you don’t pay up promptly, late fees. Car title lenders have also built up a considerable racket with mandatory (or, at least, heavily suggested) roadside assistance programs that borrowers purchase to protect the vehicle that is now almost the property of the lender! It’s not unusual to pay anywhere from eighty to one hundred fifteen dollars in fees on a five hundred dollar title loan, to put it all in perspective. Some lenders will even go so far as to charge you a repossession fee for taking your car away if you don’t pay up. Repossession fees are illegal throughout the country, but that doesn’t stop these shady folks from charging you anyway.

In terms of similarly-creepy tactics, many car title lenders will do you the “favor” of charging you several interest-only payments if you are having trouble coming up with the full amount of your car loan. This is the equivalent of a payday loan rollover, where the borrower pays only the interest every period and keeps the principle balance of the loan untouched. These loans are set up for a longer period of time, and continue as long as the borrower makes regular interest payments. In this fashion, car title loan repayments can actually add up to spectacular amounts of thousands of dollars, often surpassing the actual value of the car itself. In the mainstream financial sector, this type of loan is also known as a balloon loan. One of the CFA’s reports on car title loans as a form of predatory lending told the story of a woman who was paying four hundred dollars a month in interest on a three thousand dollar car title loan. She did this for seven months, and ultimately paid the loan on the eighth – after paying twenty-eight hundred dollars in interest on a three thousand dollar loan!

The fact that borrowers are able to roll over their obligation pretty much means that many car title loan recipients become trapped in a cycle of debt. They don’t have the money to afford the loan’s cost in the first place, or else they never would have sought the loan. Every pay cycle, they go to pay the loan and discover that they can’t get by without that money, so they have no choice but to renew the loan. It’s the only thing that these borrowers can do to stay above water, but they are actually paying out bucketloads in interest on top of the original amount that they still owe!

Then, of course, there’s the omnipresent threat of repossession. Handing a lender – or anyone – the title to your car pretty much means that they own it. According to the CFA’s study, three-quarters of all car title loan borrowers admitted to having to give the lender a copy of their car keys. Many lenders took pictures of the car in their parking lots and tested the car to make sure that it actually starts. AT least one lender admits to installing GPS devices on cars so that they can track the car’s location and remotely disable the engine if they are not paid in full and on time. In other words, don’t look for mercy from a car title lender. If you can’t pay and don’t make arrangements, they can and will come looking for you. Can’t get to work? Oh, well. Can’t pick up the kids from school? They’ll have to catch the bus. Can’t buy groceries? Should have thought of that before you signed on the dotted line. Basically, car title lenders don’t care about your life or your problems.

That’s to say nothing of the fact that you no longer have your car, which for many people is one of the most significant financial assets that they own. If you had a fairly valuable car and only borrowed a few hundred dollars, the fact that you essentially sold your ride for a fraction of its value could just be adding insult to injury. In a few American states, there are laws that compel car title lenders to pay you the difference of the loan once a lender has repossessed and sold your car, but it’s an unfortunate fact that many don’t. This means that you could default on your five hundred dollar loan and not get a penny of the difference for your car worth five thousand. This happens due to the fact that car title loans are almost always over-secured. Most lenders will refuse to loan you more than a quarter to one half of what your car is actually worth, to make sure that you have a good incentive towards paying them back. If you can’t pay up on your loan, they get the full resale value of the car. If you are “lucky”, the title lender might elect to not repo the car and will instead just take you to court for the money you own. Except, then you can expect to be ordered to pay court costs and finance charges on top of the existing loan amount.

Car title lenders defend their practice by claiming that they offer a critical financial service to people who might otherwise have no avenue of accessing emergency cash in situations where they really need it. This might well be the case, but that’s no excuse for signing over one of your most valuable assets for a quickie loan of a few hundred bucks. In some states, credit unions have stepped up to fill in the gap for consumers who might otherwise be unable to assess borrowing products due to their bad credit. These credit unions are offering month long microloans for interest rates that are much lower than that of cash advance lenders – twelve percent APR on average. They cannot be rolled over, and borrowers must allow direct debit of repayment funds from their paychecks. It’s like a legitimate, non-predatory payday loan. If this is not an option in your state, however, there are still other options – paycheck cash advances from your employer, cash advances on credit cards, emergency community assistance, small consumer loans, or borrowing from friends or family. None of these are the greatest options ever, but you never know who might be willing to know if you just humble yourself and ask.

If you absolutely feel that you need a car title loan, at least do yourself a favor and educate yourself before signing the contract. Both the CRL and CFA have dedicated themselves to helping the United States’ consumers make educated and responsible financial choices. They both have compiled a great deal of information and resources for consumers on this topic. Make sure that you know everything possible about this type of lending (including the possible consequences), and are able to make an informed choice.