Why Consumers Should Avoid Car Title Loansby Steve Cypher on Monday, January 21st, 2013
Even if your finances get tight, once you’ve paid off a subprime auto lender, taking out a car title loan could be riskier than you think.
For over two decades here at Auto Credit Express we’ve been helping consumers with bad credit find dealers for their best chances at car loan approvals. Because of this, we also understand why these buyers – especially those who find themselves on a tight budget – might consider taking out a car title loan.
And while these no credit check car loans are an easy way of quickly getting a loan, the likelihood as well as the consequence of defaulting on one far outweighs any advantages. Here’s why:
Car title loans
Car title loans are a form of no credit check auto loans that require a paid-off car as collateral. Loans of this type typically range from $175 to $2,500.
The length of one of these loans is usually 30 days while the maximum interest rate than can be charged is based on state laws and is not as strictly regulated as those covering conventional car loans (a category that also includes high-risk car loans).
In fact, some states allow title loan interest rates to be as high as 30 percent per month – not to be confused with a 30 percent APR (annual percentage rate) as this monthly percentage works out to an APR of 360%. In most cases lenders are also allowed to charge an additional loan origination fee.
Chances are you’ll find many of these lenders operating out of storefront locations that also offer check cashing services and pawn loans.
A car title loan example
Taking out a title loan for $500 means that for collateral you’ll give the loan company the free and clear title to your car along with an extra set of keys (failure to pay back the loan in a timely manner will result in repossession).
Along with a $15 origination fee, you’ll sign documents that state that the loan, plus interest, will be paid within 30 days. With a rate of 30 percent, it works out to be $150 in interest charges.
If you can’t pay off the entire amount (partial payments are usually not accepted), most lenders will allow you to roll it over for an additional 30 days, provided you pay the interest charges. Most states allow four of these rollovers per loan.
Total cost of the loan
Rolling the loan over twice (not uncommon) for a total of 3 months means the actual cost for this $500 title loan could (and many do) look like this:
1. $15.00 origination fee
2. $450.00 in interest ($150 x 3 months)
Using this example, it has cost $465.00 in interest and fees to borrow $500.00 – an annual percentage rate (APR) of 91 percent – roughly three to five times higher than a typical high risk car loan.
As we see it
Consumers, especially those with damaged credit, should consider the possible consequences very carefully before applying for a car title loan. Aside from the fact that the fees and high interest rates are extremely high, anyone taking out this type of loan is also putting their vehicle at risk. If the loan goes into default, it will require surrendering a vehicle probably worth many times the loan amount that also represents, to many consumers, the only means of transportation to and from their job.
One more important thing to remember: Auto Credit Express matches applicants that have auto credit issues with dealers that can offer them their best opportunities for car loan approvals.
So if you’re ready to establish your car credit, you can start now by filling out our online car loans application.