Payday loans have been getting a lot of bad press lately because states and cities are trying to regulate an industry that lends small amounts of money legally at interest rates that can reach a staggering 1,000% per year. The car title loan is a less well-known type of payday loan that requires the borrower to put up his or her car as collateral for the loan amount. Even though this kind of loan doesn't get as much attention as payday loans, it's even more dangerous because the borrower could lose their car.
Payday loans, which are also called "cash advance loans," are unsecured loans. The lender believes that the borrower will pay the money back within two weeks. This type of loan is risky for the lender, but the high interest rates, which can easily be over 400% on an annualised basis, more than make up for that risk.
A car title loan, though, works in a different way. When getting this kind of loan, the borrower puts up his or her car as collateral and is usually asked for a spare set of keys. If he or she can't pay back the loan, the car will be taken away and sold to cover the debt. In some states, the lender can sell the car and keep all of the money, even if it's worth more than the loan.
You might think that because there is collateral, the interest rates on these loans would be much lower than those on payday loans, but that is not the case. Nationally, the average interest rate for auto title loans is about 300% per year, which doesn't make them a good deal. Also, the loan amounts are rarely more than a small percentage of the car's value. Even a loan of half the value of the car would be seen as quite generous in the business.
There are the same kinds of problems with title loans as there are with payday loans. Most of the time, the borrower can't pay back the loan on time and has to pay a fee to extend it. In some situations, it is possible for the fees to add up to more than the loan itself is worth. And, unlike with other loans, the borrower is under pressure to pay back the loan quickly or lose their car.
This kind of loan is heavily in favour of the lender, who will get something worth much more than the loan if the borrower doesn't pay it back. People who need cash in the short term would do better to borrow from friends, family, or a credit card.
