A look at how Car Title Loans Work

Car title loans are centered on a secure offering of a car in exchange for a loan from a willing lender. While they seem good at first because they offer loans to people with low-incomes and credit problems, i.e. no credit or bad credit, they come with three catches that are hidden behind the offer. These catches include high interest, additional fees, and possible repossession of the vehicle.

In exchange for a cash loan from the lender, the borrower is required to sign over the title of their fully paid for car as a working guarantee that the lender will be repaid. Typically these loans are less than what the car itself is worth (generally 30% to 50% of the vehicle’s value) and due back to the lender within a month. Attached to the loan is an interest rate that may be slightly higher than a typical credit card rate, and seem justified, but in actuality is usually a triple digit number when read as an annual percentage rate (APR). So while a credit card company may charge an APR of 17%, a car title loan interest rate of 20% may seem just a little higher and worth it in comparison, but translates to an APR of 240%.

Additionally attached to the loan are a varying number of fees that is included with the paper work and fees for the loan itself. Furthermore, if the payback deadline arrives and the borrower is unable to pay in full, they are either charged a rollover fee to push the deadline back another month, or repossess the car. Included in the fees are other options that pay the lender each month over a set time, but still require the borrowed quantity paid back in full at the end of the duration. If the loan isn’t repaid at that time, the lender can take and sell the car without giving anything back to the original owner.

When loans are due and not paid, the car can be repossessed at any given time by the borrower with or without warning. Typically this happens because they can able to make copies of the keys and may even go as far as installing tracking devices on the cars in the form of GPS units. This way the lender can legally steal the vehicle and sell it at their discretion. As a loan may only be 30% of the car’s original worth, the lender will be able to recover that 30% value, and the remaining 70% as well as all the profits from interest and fees.

In overview of how car title loans work, if a car’s value is at $10,000 the lender may give the borrower $3,000 to $5,000, charge fees and an interest rate while gaining the ability to repossess the car at will if monthly payments are not met. Therefore, in a case where the lender provides the $5,000 loan, charges monthly interest rates of 20%, and the additional fees, they are making $1,000 in interest + part or the full of the loan + fees at the end of 31 days. If a person manages to repay then, the lender will receive in excess of $6,000. If the loan is not paid off yet rolled over for 5 months, with a payment received in full at the end, the lender earns over twice the initial loan, which is in excess of $10,000. In an extreme case, if this duration extended a full 8 months and the car was repossessed and sold in full, the lender would make in excess of $18,000 with fees excluded, while the initial borrower is without a car.