Are you planning to take out a loan soon?
Perhaps you want to start a small business, solve a financial emergency, finance a home repair project, pay for your relocation expenses or even go on a vacation.
Regardless of the reason you want to borrow the money, there’s a range of credit facilities in the lending market, from personal loans to auto title loans. If you own a car, you could be considering going in for a car title loan.
Before you make an application, here are 4 things you need to know about the title lending practice.
1. Auto Title Loans Are Short-Term Loans
When you’re applying for a loan, you certainly need at least a couple of months to pay it off, right?
Unfortunately, title loans are short-term loans that typically need to be repaid in a month’s time. If you’re unable to pay up by the lapse of this period, though, you can ask your lender to roll over the loan for another month.
2. Interest Rates Are So High
Like most short-term loans, car title loans charge exorbitant interest rates, sometimes as high as 25 percent a month. This is an annual percentage rate of 300 percent!
For instance, if you’re seeking a $1,000 title loan and the interest charged is 25 percent, you’ll pay $1,250 in a month’s time. If you need an extension for another month, you’ll pay $1,500 plus any additional rollover charges. Make that 4 months and you’ll be staring at $2,000 bill.
For comparison, the average APR on conventional personal loans (offered by banks and credit unions) is about 15 percent.
3. The Lender Can Repossess Your Car
From the math above, it’s easy to see how a car title loan can quickly morph into big debt.
When you’re unable to service the loan, it’s possible to work out a repayment agreement with your lender, but this depends on their leniency. However, if an alternative agreement is off the table or if you default on it too, the lender can initiate the process of repossessing your car.
Bear in mind, you’re to hand over your car title to the lender before they can approve your application. So when it comes to repossession, there isn’t much you can do to avoid losing your car. In fact, about 200,000 people lose their vehicles to title loan repossessions every year.
4. Title Lending Is Illegal in Some States
Let’s face it. Car title loans are predatory loans that have ruined the financial lives of many people. In light of this, a good number of states have banned the practice.
As such, be sure to do some research and learn more about the legality of car title loans in your state. If they’re banned and you really need the loan, maybe you can relocate and register your car in a state that doesn’t regulate the practice.
Auto Title Loans: A Double-Edged Sword
Auto title lending is a practice that can cause you untold financial harm or save you from a financial crisis.
If you’re a financially responsible person with a clear repayment strategy, an auto title loan can be an ideal – albeit expensive – way to raise some money. But if you’re reckless with your finances, an auto title loan can leave you in massive debt and lead to the loss of your car.
By the way, instead of taking out a title loan, selling your car can be a better option. You could buy a cheaper car and use the balance to sort out your financial needs!