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Car Title Loans: What They Are and Why You Should You Avoid Them Like the Plague

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Do you need money right now? You can borrow up to $10,000 today with absolutely no credit hassle, no application fees, and a low monthly interest rate! Even better, you can have your money in less than 15 minutes!

Sound too good to be true? Oh, it is. Welcome to the world of the car title loan industry, the underbelly of the financial world, the purveyors of loans with interest rates so high they give you vertigo.

If you own a car with a lien-free title and have a government-issued ID, you can get a title loan. All you have to do is put your vehicle up for collateral. It doesn’t matter if you have a credit score of 102 and have a part-time job that pays minimum wage. It doesn’t matter if you make $1,100 a month and have a mountain of debt. Car title lenders don’t care, and in fact, they will profit grandly from you whether you pay the loan off or default on it and wake up one morning to find your car gone.

Car title loans are considered by many experts to be the worst type of all subprime loans, which are those that are offered to people who need a little money for an emergency but don’t qualify for prime rate bank loans. The annual interest rates on these types of loans can reach 300 percent and above, with the average car title loan customer taking out a $950 loan and paying $2140 in interest fees alone.

Why Might You Feel the Need to Take Out a Title Loan

It’s Friday morning, and you’re putting on your makeup or shaving your face fuzz, when suddenly you hear a little *pop* and the lights go out. Confident that you’re not that far behind on the electric bill, you call Acme Electric Company to find out if there’s an outage in your area. No, they say, we’ve just disconnected your service pending a payment of the past-due balance of $450.

You beg. You plead. You even cry. You lie, too: you tell them you have small children in the house who need warm water for their baths. Your grandmother is upstairs, and she needs electricity for her dialysis machine. You have a dozen little baby chicks out back who’ll die without their heat lamps. But Acme Electric Company doesn’t buy it. Pay up or sit in the dark all weekend, buddy. It’s nothing personal, just policy.

Since you’re one of the 76 percent of Americans who lives paycheck to paycheck, you’re caught between a rock and a dark house, and so you do what 1.7 million Americans do every year: You drive to the nearest car title loan provider, located in a strip mall between a nail salon and a pet shop, and you take out a loan that’s probably going end up sending your blood pressure soaring about as high as the interest rates you’re paying. But right now, you have no choice. Your pint of Ben & Jerry’s is melting in the freezer even as you dot your i’s and cross your t’s.

How Car Title Loans Work

While you’re filling out the title loan application, the lender inspects your car to determine its value, which is based in part on the Kelley Blue Book value. They ask for your ID and maybe a utility bill as proof of residence, and they may or may not require proof that you have some kind of income. Sometimes, a bank account with a minimal amount of cash in it is all the proof they need. Sometimes, you don’t even have to have a bank account.

You hand over the spare set of car keys and the original copy of your title so they can put a lien on it. The lender may install a GPS tracking device on your car so that it can be disabled and located for easier repossession if you default on the loan.

The lender values your car at $4,000, gives you your $450 and explains that you’ll need to come back in 30 days with that amount plus $112.50 in interest, for a total of $562.50. And that’s on top of the fees, mind you, which may include origination, document, and processing fees or mandatory life insurance or breakdown insurance.

Rollin’ it Over… and Over… and Over…

So, how are you going to be able to come up with $562.50 in expendable cash to pay off the debt in just four weeks when you were unable to pay your electric bill for the past three months?

Well, you’re probably not. The average car title loan customer rolls over the loan eight times, which means that at the end of the initial 30 day period, you pay only the $112.50 in interest and re-up for another month, during which interest will accrue at the same rate. You do that seven more times before you’re able to pay it off, and that $450 loan will have ended up costing you $1,350 plus fees. For the sixteen percent of title loan customers who stay in continuous, snowballing debt for one year, a $450 loan will end up costing them $1,800.

If you default on a payday loan, the title loan’s sleazy cousin, the payday lender might take you to court, garnish your wages, or send you to collections. But car title lenders don’t need to bother with that, since they own your car.

Cry Them a River

So here’s a common scenario for you: Let’s say your lender limits the number of times you can roll over the loan to eight. You roll it over eight times. Each month, you’ve paid $112.50 in interest, and at the end of the eighth month, you still owe the principal amount of $450 plus that month’s interest. Still can’t pay it? Say goodbye to your only means of transportation. You now have to take the bus to work. You have walk your kids to school, a three-mile round trip, uphill both ways. You become that dreaded friend who always asks for rides.

While a few states have laws that require title lenders to give you the remaining proceeds from the sale of your car after they take what’s owed them, most states regulate title loans under pawn laws, which means that if your outstanding balance is a paltry $562.50 and your car sells at auction for $4,000, the lender can take out what you owe, pocket the $3,550 surplus, and call it even.

Worst Case Scenario

When it’s all said and done, one worst-case scenario is that you take out a $450 title loan, pay $787.50 in interest over seven months, still owe $562.50, and then lose your car and your $4,000 worth of equity in it. That past-due electric bill has now cost you a grand total of $5,350 plus the cost of buying a new vehicle.

Now, which is preferable: spending a weekend in the dark while you use your resourceful nature to scrape together the funds to get the electricity turned back on, or donating $5,350 to an unscrupulous lender in an industry that sees profits of over $3.6 billion a year?

Exactly. So light up some candles, call it a romantic weekend, and thank your lucky stars that you stumbled upon this article before you made what might have been the biggest blow to your finances since that time you spent your tuition money on a massive kegger for your 21st birthday. (You’re welcome.)