Title loans are bad, bad news for many, if not most, of the 1.7 million people who take out these high-interest, predatory loans each year. Predatory loans are those that prey on the people who can least afford their extremely high interest rates, and title loans are the worst of the worst.
Pretty much anyone can get a title loan, even if those who have the lowest possible credit score. In many cases, you don’t even have to prove that you have any sort of income in order to get a title loan. Why? Because to get your money, you hand over the original title to your car and, in most cases, an extra set of keys so that when you default on the loan, as on out of six borrowers will do, the lender won’t have to bother with a tow truck. They’ll just send someone over to unlock the door and drive off in your only mode of transportation, with your hopes and dreams rattling behind it like tin cans tied to the bumper with string.
See, title loans are designed to make you a slave to paying the high monthly interest fees while rolling over the principal to the next month, then the next, then the next, because let’s face it: if you take out a $1,000 title loan because you need $1,000 and you don’t have it lying around, it’s pretty much a guarantee that you’re not going to have $1,250 lying around 30 days from now.
By the time you’ve rolled over your loan the industry average of eight times, you’ll end up having paid a total of $3,000. If you roll it over for a year, that $1,000 is gonna end up costing you $4,000. If you end up defaulting on the loan, as around 17 percent of borrowers do, the lender will repossess your car and sell it at auction, probably for a lot less than it’s worth. They’ll take the amount you owe from the proceeds, and if you’re lucky enough to live in a state that has a law saying they have to pay you the surplus, you’ll get a check that may or may not cover the cost of a new set of wheels. If you’re not lucky enough to live in a state that requires title lenders to pay you the surplus, you’ll lose every penny of equity you have in the car, even if you only owe $500 and your car sells for $7,000.
And that’s how the title loan industry enjoys $3.6 billion in profits every year.
So before you risk losing your car or paying back four-plus times the amount you borrowed, sit down and ask yourself these three very important questions.
Do I really need this money?
“Need” is rather open to interpretation. You may “need” a new TV because you put a hole in the old one when you were moving your new couch into the den. You may “need” to take a trip to attend your BFF’s wedding. You may “need” any number of things, but let’s clarify what constitutes “need” when it comes to title loans.
In order to justify paying the astronomical interest rates and risking getting way behind on other bills because you have to pay huge amounts of money every month in order to keep your car, then “need” means that if you don’t get this money, you will either die or suffer unbearably. And by “suffering,” we don’t mean having to watch TV on your phone or missing out on the grand party that will be your BFF’s wedding. By “suffering,” we mean you won’t be able to get pain medication after your emergency appendectomy, or we mean you’ll have to spend months without refrigeration, cooking capabilities, or lights due to the electricity being shut off for nonpayment.
Even then, you have to ask yourself:
Do I have any other options?
Do you have wealthy parents or a rich uncle you can go to for a short-term emergency loan? Yes, it’s really hard to ask, and it sucks a lot more than most things suck. But it doesn’t suck as bad as sinking into uncontrollable debt that, worst case scenario, could leave you carless, homeless, and penniless or, best case scenario, will leave you nauseated for the rest of your life when you think about how you paid a sleazy title lender $3,250 in order to borrow $750. So if it’s at all possible, swallow your pride, and ask.
You could also try contacting your local credit union. You might be surprised, since many credit unions offer short-term, small dollar loans at reasonable interest rates, even for people who have less-than-stellar credit.
If the emergency involves costly medication, talk to your pharmacy about whether the drug manufacturer has a hardship assistance program. Most do, and you may be able to get the medication for free or at a greatly reduced price.
If the emergency involves utilities or other bills, try to work out a payment plan with the creditor. If you’ve been threatened by a creditor, talk to an attorney, since there are strict laws that govern how a creditor can approach you for payment.
If you’re having no luck with the gas or electric company, perhaps your utility emergency qualifies for government assistance through the Department of Health and Human Services’ Low Income Home Energy Assistance Program.
Do you have anything to pawn? Losing your favorite diamond ring or giving up the Wii for a couple of months is waaaaay better than losing your vehicle and some or all of the equity in it. Pawn shops get a bad rap, and often for good reason, but in general, they’re much less slimy and dangerous than title loans.
If the answer to this question is “no,” then ask yourself:
When can I realistically pay back this loan?
Your third question will help you figure out – realistically – when you’ll be able to pay off the loan and how much you’ll end up paying so that you’re not surprised and sickened when it comes time to drop a huge balloon payment in order to save your car, which will likely be due after you’ve already paid back the amount of the loan three times over in interest payments alone.
Know what the monthly interest rate is before you head in to sign the loan papers. Know how many times you’re allowed to roll over the loan. And know this: if you roll over the loan principal and pay just the interest, eventually you’re going to have to make that last payment, which will be the principal amount plus one more helping of monthly interest. This is called a balloon payment, and they’re so damaging that these types of payments are illegal in some states and a sure sign of a predatory loan.
Here’s a typical example of the life of a title loan:
You take out $1,000 at the more-or-less standard monthly interest rate of 25 percent. To calculate the amount of interest you’ll have to pay each month during which the title loan’s principal is outstanding, multiply the amount of the loan by the interest rate, wherein .25 = 25 percent.
At this rate, the amount of interest you’ll have to pay each month while the principal is outstanding is $250. If you don’t pay at least that amount, you’ll be in default and your car will be repossessed.
So at the end of the initial 30 days, you’ll owe $1,250. If you can’t pay back that whole amount after 30 days, you’ll have to pay back at least the $250 in interest. For each month you don’t pay back the $1,000 principal, you’ll have to pay that month’s $250 in interest if you want to avoid waking up to find your car gone.
Eventually, you’ll need to come up with that last balloon payment of $1,250 in order to stop throwing money you can’t afford at a lender who’s raking it in hand over fist, thanks to the hard times of others.
Before you hand over your title, figure out how exactly how you’re going to pay off that title loan as soon as humanly possible. Quit smoking, stop eating at restaurants, don’t buy anything you don’t absolutely have to have until your loan is paid off.
Knowing exactly what you’re getting yourself into is absolutely critical for avoiding unpleasant surprises, such as thinking, as far too many people do, that the $250 a month you’re paying is going toward paying off the initial $1,250 that’s due after the first month. It’s not. It’s the 25 percent per month interest on the $1,000 loan. You can pay $250 a month as long as you want, but the very last payment of the loan is going to be $1,250, no matter how much you’ve already thrown at your lender.
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