Consumers with crummy credit that have successfully paid off a car loan often overlook what a car title loan could ultimately end up costing them
Even if finances get tight, once buyers with questionable credit have paid off an auto loan taking a chance on a car title loan could be risky.
Here at Auto Credit Express we know this because for the past two decades we’ve been helping consumers with bad credit looking for online car loans find those dealerships that can give them their best opportunities for car loan approvals.
We also understand why these consumers, especially those on a tight budget, would seriously consider taking out a car title loan. But while these no credit check car loans are an easy way of getting some quick cash, the consequences and chances of defaulting on certainly outweighs any advantages. Here’s why:
Car title loans
Car title loans require a paid-off car as collateral with loan amounts usually ranging from $175 to $2,500. The length of a typical loan is 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 auto loans – a category that also includes subprime car loans.
Because of this, some states will allow the interest rates on title loans to be as high as 30 percent per month. The monthly rate, by the way, should not be confused with a 30 percent APR (annual percentage rate) as a 30 percent monthly rate computes out to an APR of 360%. Topping it all off is the fact that lenders are usually also allowed to charge an additional loan origination fee.
Like predatory payday lenders, car title lenders can be found operating out of storefront locations that also offer check cashing services and pawn loans.
A title loan example
To qualify for a $500 car title loan, borrowers must give the lender the free and clear title to their car along with an extra set of keys (making repossession easier) as collateral.
Along with a $15 origination fee, borrowers will sign documents that state that the loan, plus interest, must be paid within 30 days. With a rate of 30 percent, that works out to be $150 in interest charges.
If the borrower cannot pay off the entire amount (partial payments are usually not accepted), most lenders will allow the loan to roll over for an additional 30 days, provided the current interest charges are paid. Most states allow four of these rollovers per loan.
Total loan costs
Rolling the loan over twice (not uncommon) for a total of 3 months means the actual costs for a $500 title loan could resemble this scenario:
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 subprime auto loan. Failure to pay the loan off will result in repossession of the vehicle used as collateral.
The Bottom Line
Consumers, especially those with problem credit, should carefully consider the possible consequences before applying for a car title loan. Aside from the fact that the fees and high interest rates are extremely high, taking out this type of loan is also puts the vehicle used as collateral at risk. If the loan goes into default, it will require surrendering a car typically worth many times the loan amount that represents, to many owners, the only means of transportation to and from a job.
Another good tip: Auto Credit Express matches people with auto credit difficulties to those new car dealers that can offer them their best chances for approved car loans.
So if you're ready to reestablish your car credit, you can begin now by filling out our online car loan application.