Over the past few years, a new kind of subprime lending has spread across the nation. These new loans, often called car title loans, offers cash-strapped consumers with poor or no credit a lump sum of money in a loan secured by the title of a car that they own. In many places, these loans have replaced the payday loans that used to serve customers with low incomes or poor credit, as payday loans have been subjected to stricter regulations in many states. While car title loans may seem like a good idea on the surface, there are numerous reasons why you should avoid them.
Many Borrowers Cannot Repay The Loans
Companies that write car title loans can generally be found where the population is less affluent. Many of the individuals seeking these loans have limited financial means and are already living paycheck to paycheck. The people often resort to the car title loans because they believe that there are no other lending options available to them. The borrower’s ability to repay is not taken into consideration because the amount of the loan is based solely on the resale value of the vehicle. A high number of individuals are unable to repay the original amount when due, which typically indicates a predatory financial product.
The Interest Charged For The Loan Is Very High
The interest rate that lenders charge for car title loans are astronomical when compared to other financial products. The annual interest rate for a typical bank loan is around 5 percent and for a credit card can be as high as 25 percent. In comparison, the interest rate charged for a car title loan averages between 80 percent and 500 percent when all of the fees are factored in. In one case recently reported in the news, a man that took out a $4,000 car title loan was required to pay more than $9,000 total before the loan was cleared and his car was no longer under threat of repossession.
Many Borrowers End Up In A Vicious Debt Cycle
Many of the individuals that use car title loans get trapped into an endless cycle of debt. Many of them are unable to afford to pay off the entire loan when the loan period is up. The only way that they can pay off the current loan is to reapply for another loan as soon as their time is up with the first loan. Each time they renew the loan, more fees are added. The average individual using a car title loan renews the loan more than 5 times before it is paid off or the car is repossessed by the lender. Many car title loan recipients find themselves paying a great deal of money in fees to the lender over a long period of time with no recourse or relief.
The cons of taking out a car title loan outweigh the pros for all but the absolutely most dire cases. If you need some extra money, here are some better ways to obtain it.