Title loans are bad news for most of the 1.7 million Americans who take out these loans each year. In a nutshell, a title loan is a high-interest, over-secured predatory loan that can provide you with funds in an emergency. All you need in most cases is a car with a lien-free title in your name and a government-issued ID. You give the original title to the lender, they put a lien on it and give you your cash, and you still get to drive your car. Well, you get to drive it until it’s repossessed, if you’re one of the 17 percent of title loan customers who defaults on the loan because you were blindsided by its exorbitant cost.
If you’re considering taking out a title loan, don’t even start looking into your borrowing options until you’ve exhausted every other possible avenue for getting money. Before you start shopping, though, make sure you know these essential terms so that you can make the best possible decision and avoid a heap of trouble that makes getting your kneecaps whacked by beefy gangsters in suits seem like a fancy holiday with lots of fuzzy bunnies and flying valentines.
The Worst Type of Loan
Title loans are the worst type of predatory loan out there. A title loan is a sub-prime, over-secured loan that requires you to hand over your car title as collateral. The lender will put a lien on the title in the event you default on the loan.
Predatory loans are those that put unfair loan terms on a borrower or that convince a borrower to agree to the terms of a loan through deceptive or exploitative actions. Since car title loans are extremely expensive and lenders often deceive borrowers about the true cost of the loan, these loans are considered to be predatory.
Sub-prime loans are those that are offered at much higher interest rates than standard bank loans, and they’re reserved for people who have a poor credit score, a low income, or otherwise don’t qualify for a prime rate loan.
Collateral is something of value that you legally promise to give the lender if you end up defaulting on the loan. In the case of car title loans, the collateral is the title of your car, which is basically the same thing as giving the lender your car. But you don’t have to actually give them your car, because they have the title and probably required a spare set of keys and installed a GPS system in the car when you took out the loan, making it pretty easy for them to take as soon as you miss a payment.
Over-secured means that the collateral is worth a lot more than the amount of money you got from the lender. Car title lenders usually only give you 25 to 40 percent of the wholesale value of your car.
Defaulting on the loan means that you didn’t adhere to the loan agreement and skipped a payment or stopped paying on it altogether.
A lien is a legal document that gives the lender a stake in the collateral. The lien on your title essentially means that the lender owns your car until you pay off the loan. If you default, the lender can repossess your car, sell it, and keep the money. Usually, they can keep all of the money, even if your car sells for $5,000 and you only owed $500 on the loan.
Most title loans have a loan term of 30 days, at which time the principal plus the interest are due. If you can’t pay, the loan can be rolled over, but fees and interest will be charged for the next 30-day period as well. (In some states, but not nearly enough of them, usury laws limit the amount of interest the lender can charge you.) Some lenders may offer a longer loan term with interest-only payments, and after the loan term is up, a large balloon payment is due.
Loan term refers to the agreed-upon length of time you have to pay back the loan. Title loans typically have a term of 30 days.
Principal is the original amount you borrowed before any interest or fees were added.
Interest is the amount of money it costs to borrow money for a certain period of time. Interest is expressed as a percentage rate. The annual percentage rate, or APR, is how much the loan will cost you if the loan term is one year. The monthly interest rate is how much the loan will cost you if the loan term is one month. Although most title loans are for a 30-day term, Federal law requires lenders to express the interest rate in terms of the APR. However, many title lenders do no such thing, because they don’t want you to realize how high the interest really is. But all you have to do get the APR is multiply the monthly rate by the number of months in a year.
Interest-only payments are offered by many title lenders for loans with terms longer than 30 days. If you take out a $1,000 title loan for a 90-day term at an interest rate of 25 percent a month, you’ll pay $250 in interest after the first month and $250 after second month. At the end of the third month, you’ll owe a balloon payment of the last $250 interest payment plus the principal amount of $1,000.
Balloon payments are large payments that are due at the end of the loan term. Balloon payments are comprised of the entirety of the principal plus the last month’s interest payment.
Usury laws limit the amount of interest a lender can charge on a loan, but only a small handful of the states that allow title loans have usury laws that cap the interest rate, usually at 36 percent APR.
Rollovers, Fees, and Penalties
Title lenders often charge additional fees that that they’re less than up-front about. You may also have to agree to certain add-ons in order to take out the loan, and most title loans carry an early repayment penalty. If you’re unable to pay your loan off at the end of initial 30-day term, you can roll over the loan for another month, but you’ll have to pay the fees and interest for that 30-day period as well.
Fees for title loans usually cost between $10 and $25 for every $100 you borrow, and that’s in addition to the interest charged on the loan. Additional fees may include processing fees, document fees, origination fees, late fees, and lien fees. A $500 loan may end up costing you up to $115 just in fees. Another common fee lenders charge is a repossession fee, which is the very definition of pouring salt in an open wound. Although repossession fees are illegal, title lenders commonly charge them anyway, costing you even more for the privilege of having your car repossessed and sold by the lender.
Add-ons commonly required when you take out a title loan. Some lenders may require you to add life insurance so that if you meet your demise before the loan’s up, they’ll still get their money. You may be required to take out breakdown insurance so that if the car breaks down during the loan term, the lender won’t lose any money if they end up repossessing a car that’s worth less than the loan amount. Roadside assistance is another common add-on.
Early repayment penalties ensure that if you pay the loan off early, the lender won’t have missed out on all that interest you didn’t think you’d have to pony up by doing so. These penalties are very commonly seen with title loans, but they’re often hard to find in the paperwork, and lenders are rarely forthcoming with information about them.
Rolling over the loan essentially means you take out the same loan again for another 30 days. Some title lenders let you roll over the loan indefinitely, while others limit the number of times you can roll over the loan. When you roll over a loan, you have to pay another month’s worth of interest as well as additional fees.
Study these terms hard, my friend, and as always, read the fine print. Read it carefully, and if there’s something you don’t understand, ask. If the answer is vague or unsatisfactory, keep your pen in your pocket and don’t sign the loan document until you fully understand exactly how much the loan is going to cost you and exactly how you’re expected to pay it back. Otherwise, when they hand over that $500, it could end up being the amount for which you sold the lender your $5,000 car.
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