You might think that you would never consider a a loan with an APR of 300% but according to the Association of Responsible Auto Lenders, over $1 million U.S. Consumers obtained over$6 billion worth of loans each year… Title Loans
You may or may not have even heard about title loans but for a lot of middle-class families, a car title loan is a loan is their go-to financial product when unexpected expenses pop up. But what is a “Title” loan you ask?
A title loan is simply a small, short term loan collateralized by your vehicle’s title. To get a car title loan, you are required to give the lender the title to your vehicle – for example, your car, truck or motorcycle. There is of course a fee that you have to pay the lender to borrow the money. In most cases you have 30 days to repay the loan.
As you can imagine, Car title loans can be very expensive. If you are unable to pay back the money you owe, the lender can take your vehicle.
Just how do these title loans work?
A title loan can be obtained online or at a store. Here is how they work:
- You provide the lender with you vehicle’s title
- Fill out an application
- Show them your car and
- your photo ID
There are some lenders that will require you to leave an extra copy of your car keys.
- If the lender approves your loan, you get you money and they get you title… you get to keep you car.
- When your due date comes around, usually in 30 days, you pay the lender the amount you borrowed, plus a monthly fee.
So just how much is a title loan going to cost?
Lenders make their money by charging you a monthly fee. This fee can be exuberant, often as much as 25% of the amount that you borrow.
Consider this… If you borrow $1000 for 30 days, with a monthly fee of 25% ($1000 x 25% = $250), the amount you will have to repay when your 30 days are up is $1,250 That’s not chump change!
How do I compare costs?
Most every loan has an annual percentage rate. This is also called the APR. The APR will let you know how much the money you are borrowing will cost. As you can see, the APR on car title loans can be very high. Whenever you get a title loan, the lender is required to tell you what the APR is and the cost of the loan in dollars.
Just what is an APR?
An APR is based on a couple of things:
— How much money you are borrowing
— The interest rate and the monthly finance charge
— Just how much you are going to pay in fees
— and how long you borrow the money
So if you want to borrow $500 and pay back the money in 1 year, let’s compare the cost of borrowing the money from a few different sources…
– A bank has a loan with an APR of 7.5%
– To borrow $500 you will pay $21 in interest.
– If you use your credit card with an APR of 20%
– You will pay $56 in interest to borrow $500
– Now for the Car Title Loan with an APR of 300%
– You will pay a whopping $1,111 in interest alone to borrow only $500!
So what happens if you can’t pay the title loan lender when your loan comes due?
In most cases if you cannot repay the total amount that you owe, the kind and caring title loan company will say “no problem! We can just “rollover” the loan and all you will have to pay is the monthly interest” What a great deal huh? Once you pay the monthly interest, your loan is good for another 30 days. If of course you can’t pay back the money when the next 30 days rolls around, they will happily roll your loan over again. If you roll your loan over time and time again, you will end up paying a cazy amount of money for your small loan.
But what happens if you can’t repay the loan or even make the monthly interest payment?
Worst case scenario, if you cannot repay the lender, they will take your car. This, as I’m sure you are aware, is called repossession. The lender will likely sell your car and keep the money.
Imagine if you lost your car… It might be your only method of transportation. Now you are unable to get to work, school, the store or any other place that you need to go. …all or a tiny little loan.
So what should you do if you find yourself in a situation where you need a little cash to hold you over or pay an unexpected expense?
Well, before you get involved in a car title loan think about these choices:
~ Can you get a loan from a bank?
~ Do you have any money saved up that you can use?
~ Can you call your creditors and ask for more time or maybe a payment moratorium?
~ Do you have a credit card you can use?
~ Do you have a friend or family member that you can borrow the money you need?
It is best to exhaust all of your options before you saddle yourself with a high cost car title loan.
