When you need money, you often need it right away. By giving out car title loans, finance companies sometimes make it easy for people to solve their money problems. The quick cash that a car title loan promises often leads people astray.
People say that car title loans are unfair because they have interest rates as high as 360 percent. To get a car title loan, a person must hand over the title to their car as collateral. Since car title loans are open-ended credit, there is no maximum interest rate or end date.
So, how does someone get a loan against their car title? It's easy. When a person goes to the finance office to get a car title loan, they are asked how much money they want to borrow. The borrower can get a loan quickly and without a credit check if they put up their car title and an extra set of keys as collateral. Most of the time, the loans are for less than $1,000.
After 15 days, the borrower makes the first payment, and then every 30 days after that. The borrower pays 1% interest per day and must pay at least 10% of the loan's principal with each payment, except for the first one.
The annual percentage rate for every car title loan is up to 360%. The car title loan can be paid off early without any fees, but if you miss a payment, the car can be taken away. Because of this, many people who borrowed money are losing their cars.
This "secured lending" is supposed to be cheaper for borrowers than "unsecured lending" because the lender can look to collateral if the borrower doesn't pay back the loan. Because of this security, it is a very different kind of loan than a payday loan and shouldn't be put in the same category.
The car title lenders got around the limits on interest rates by setting up the debt as an open-ended loan, like a credit card. Open-end credit was made easier to get because federal law let card issuers in other states use their no-cap laws in their own states. The government has never decided that it should be easier to get small loans with collateral.
Most loans backed by a car title have interest rates that are much higher than those for unsecured credit cards. Unsecured loans, like credit cards, are riskier because they are not backed by anything. Even though there is more risk, credit card companies charge an average interest rate of 12.5%. Yet, the interest rates on car title loans, which are backed by cars that the borrowers own outright, are 29 times higher than the interest rates on credit cards.
The first payment on these loans is due just 15 days after getting the money. This is because the annual percentage rates are so high and there is a high chance of getting the money taken away. If you don't pay your first car title loan payment or any other payment, your car will be taken away. At the moment, there is no information about how many cars have been repossessed, but at one auction house, over 150 repossessed cars have been sold.
Also, the value of your home goes down. For example, many Iowans' most valuable thing is their car. This asset is put at risk by car title loans, and Iowans are losing all of their equity because the interest rates are so high. When a client's car is repossessed, any extra equity they may have built up is eaten up by the costs of repossession and the interest rate charges.
The "financial emergency" that forced these people to take out a desperate car title loan rarely lasts as long as the loan terms, so the interest adds up quickly because most people can't pay off the loan with a balloon payment. It seems like you won't be able to get out of a car title loan at all.
Here are some tips for a loan term that is affordable. These things should also keep you from getting a car title loan:
Set loan terms that are fair and easy to pay back. Loans backed by a title should be paid back in affordable instalments instead of all at once. Is this how your car title loan works? Rates should be limited, and lenders should have to think about how much a borrower can pay back.
Protect borrowers after they stop paying. States should make it illegal to do things like seize cars without warning, keep the difference between the sale price and what the borrower owes, or go after the borrower for more money after taking back the car.
Close loopholes to make sure rules are followed consistently. States that let people borrow money against their car titles should close loopholes that let some loans get around the law and make sure that the law applies to all lenders, even those who work in more than one state.
- Monitor Lenders Better. States should keep a close eye on lenders by having strict rules about licencing, bonds, reporting, and exams.
Make sure that people who borrow money can use their rights. Borrowers of car title loans should have the right to sue title lenders and get out of contracts that break the law. Should get rid of binding mandatory arbitration clauses that keep borrowers from going to court to challenge unfair practises.
