Why Car Title Loans are a Bad Idea

A car title loan is a short-term loan, usually 30 days, against the title of a vehicle. There cannot be any other liens against the title. This type of loan is targeted toward people with low income and bad credit. Lenders will finance between 20% and 50% of the value of the car. The amount offered is intentionally low to insure that the lender will be able to recoup his money in the case of a default. In addition to paying the high interest rate which averages 300 percent, the borrower must also pay a variety of fees including those to originate the loan, place the lien against the title, document processing, and roadside assistance. The borrower will also have to provide a copy of the car keys. From the start, the additional expense involved with this loan makes it a bad idea.

Some companies install equipment which allows them to shut off the vehicle remotely if the payment is not received on time. This is a double penalty to the borrower. He needs the car in order to earn the income required to pay for the loan. When the car is shut off remotely, the borrower cannot start the car. He may be stuck at work, or at the store, or anywhere. The customer must find alternate transportation for everyone in the family who depended on the car until payment is made. The borrower must then make the payment immediately or he will either lose the car or be taken to court. The title loan is a bad idea due to the chance of losing a job from lack of transportation.

If the company chooses to take the borrower to court for non-payment, it can charge additional fees for court costs which puts a further burden on the borrower. If the company decides to sell the vehicle, they can usually keep all of the money, even what is in excess of the amount owed. So if a customer borrowed only $500 against a $5000 vehicle, he could lose everything. This happens because many states do not regulate this type of lending. It is a bad idea to take the chance of losing a vehicle that you worked hard to buy and maintain.

Sometimes a lender will allow the customer to rollover the loan if he is unable to pay. However, this choice also works against the borrower as there will most likely be rollover fees and possibly a late payment fee. On a rollover loan, the customer must still pay the interest every month. A customer who rolls over his loan several times could pay more in interest and fees than what he originally borrowed. The customer would still owe all of the original loan since his monthly payments were not credited to the principal balance.

Car title loans are advertised as helping people through a financial tight spot. The reality is that the customers are much worse off than when they started. Since most of the car title loan customers are low income, they simply do not have the resources to repay this type of obligation. Many end of paying thousands of dollars and then still lose their vehicle. Car title loans are a bad idea for all borrowers. The only people who profit are the predatory lenders.