Title loans are short-term, small-dollar, high-interest loans that are predatory by nature. No credit checks are performed, and no proof of income is required in many cases, which makes these loans easy to get, but only those who don’t have any other options will stand for the ridiculously high interest rates that make title loans so detrimental to one’s sanity and personal finances.
These loans should be reserved for dire emergencies only. One out of every six people who takes out a title loan ends up with the family car repossessed. The lender sells the car to recoup the outstanding balance of the loan, and while some states require that the surplus proceeds be passed on to the borrow, others don’t, and God forbid title lenders should do the right thing and not keep that $5,000 they made on your car after taking out what you owed on the loan.
Yeah, title loans are really, really bad news, unless you’ll be able to pay off your loan at the end of the initial 30-day term. Otherwise, you’ll have to keep rolling over the principle while paying a sky-high interest payment every month that doesn’t go anywhere near the principal balance. When you can’t roll over the loan anymore, either because you’ve reached the lender’s limit or because you’d rather lose your car than keep throwing money you can’t afford at a loan that you’ve already paid off three times over in interest payments, you’d better get your personal effects out of your car, because the repo man will be calling any day now.
Warding Off the Repo Man
Let’s rewind. Before you ever sign that title loan, you need to have a plan in place to ensure you don’t get caught in a cesspool of unbelievably unfair debt. Here are three things you need to do before you sign a title loan agreement.
1.Know the Details of Your Loan
Avoiding getting caught by surprise is the first step in getting to keep your car when you take out a title loan. There’s a guy who thought his $500 loan was going to cost a total of $625. When he couldn’t pay the whole thing off at the end of the initial 30 day term, the lender told him he could just pay the interest and fork over the rest the following month. So he paid $125 and rolled over the principal. He did that for the next four months, and then he thought the loan was paid off. When they came for his car, he was all, But I paid the $125 every month for five months! It’s paid off! and the lender was all, No, man, those $125 payments were just for the interest for those months! You kept rolling over the $500 principal! and he was all, Wha??? I still owe you $500? and the lender was all, No, dude, you owe us $625, including the interest for this month! Poor guy had paid $625 on a $500 loan and he still owed $625!
So the first thing you want to do is know and understand the details of your loan. Here’s what you should ask the lender. Have him or her point to this information on the loan agreement, and underline it:
- What is the monthly interest rate on this loan?
- What are the exact fees I will be charged on this loan in addition to the interest?
- Can I roll over the principal to the next month if I can’t pay the whole amount back in 30 days?
- How many times can I roll over the principal to the next month?
- Does our state law require you to inform me before you repossess my car so that I have one last opportunity to pay off the loan?
If you repossess my car, does our state law require that you inform me a certain number of days in advance of the earliest date on which my car will be sold?
Many lenders will be knowledgeable about the various aspects of the loan and happily willing to help you understand what you’re getting yourself into.
But if the lender can’t or doesn’t seem to want to answer one or more of these questions, you need to hightail it out of there, pronto. Seriously. Put down the pen, tell the lender he or she should be more informed about the industry in which he or she works, and walk out the door.
2. Know Your State’s Laws
Title loans are legal in just 20 states, and in those states, the laws that govern title loans vary widely. Some states barely acknowledge that these loans even exist and let lenders have free reign in terms of inventing new ways in which they can screw you over while maximizing their profits, while other states have interest rate caps in place and have outlined exactly how a repossession must play out. Make sure your title lender and the loan contract adheres to the letter of the law, and if you feel you’re being treated illegally or unfairly, contact your state’s Attorney General’s office. You may be able to sue the pants off your lender and get punitive damages to boot.
3. Figure Out a Repayment Plan
The next thing you need to do is figure out exactly when you’re going to be able to pay off the loan. At some point, a balloon payment of the principal plus one month’s worth of interest is going to come due, and you’re going to have to have that wad of cash on hand to pay it off. And the sooner you do that, the less money you’ll be throwing in the toilet and flushing into the sewer.
If you can’t pay off the loan after the initial term, you can roll over the principal and pay only the interest. But another helping of interest will accrue the following month, and you’re going to find yourself out of a lot of money if you keep rolling over the principal. So know exactly how many times you’re going to have to roll over the loan – keeping in mind the lender’s rollover limits – before you have saved enough money to make that last balloon payment.
Then, start saving. Cut out of your budget what you need to cut out in order to save more money faster. Downgrade your phone or cable service if you have to, and pinch your pennies faithfully until you’ve got enough to get your car title back.
Once the loan is paid back, start putting a little money away each month in an emergency fund. Even if you can only afford $20 a paycheck, do it. That money will add up fast, and next time an emergency comes up, you may not have to take out a title loan, or you may be able to get away with a smaller loan amount.
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