Car Title Loan
Written by: Simon Gelfand
When you need money, often times the need is immediate. Finance
companies sometimes offer an easy way out of financial problems
by offering a car title loan. Unfortunately, clients are misled
by the quick money that a car title loan offers.
Tagged as abusive, car title loans charge extremely high
interest rates of up to 360%. To receive a car title loan, the
consumer must sign over their car title as collateral. Set up as
open-ended credit, car title loans are not subject to an
interest rate limit or a maturity date.
So how does one get to have a car title loan? It's simple. A
customer enters the finance office to apply for a car title loan
and is asked how much money they would like to borrow. With no
credit check and no delay, the borrower can obtain a loan by
exchanging their car title and an extra set of keys to their
vehicle as collateral. The loans are typically less than $1,000.
The borrower then makes the first payment after 15 days and then
every 30 days thereafter. The borrower pays one percent interest
per day and must pay a minimum of ten percent of the loan
principal with each payment, excluding the first payment. Every
car title loan has an annual percentage rate of up to 360%.
While the car title loan can be paid off early with no penalty,
the vehicle can be repossessed with one missed payment.
Unfortunately, many borrowers are losing their transportation
because of this. This "Secured lending" is supposed to be
cheaper for borrowers than unsecured lending because the lender
can look to collateral in the event of default. That security
means that it is a kind of lending that is in a vastly different
category than payday loans - and should not be compared to it.
The car title lenders have avoided interest rate limitations by
structuring the debt as open-ended credit, like credit cards.
Open-end credit was deregulated because federal law let
out-of-state card issuers export their no-cap law. The
legislature has never decided that secured, small loans should
Most secure title loans are charging a much higher interest rate
than unsecured credit cards. Credit cards are unsecured, and
therefore more risky than secured loans. Despite the greater
risk, the current average interest rate charged by credit card
companies is 12.5% . Yet car title loans which are secured by
cars which are owned free and clear by the title loan borrowers,
are being charged rates that are 29 times the rate being charged
on credit cards.
Due to astronomical annual percentage rates and because of the
high repossession rate, the first payment on these loans is due
a scant 15 days after borrowing the money. Failure to make the
first payment of your car title loan, or any one payment
thereafter results in repossession. While no data is currently
available on repossessions of cars, at one auction house, over
150 vehicles have been sold after being repossessed. There is
also the loss of equity. For example, for many Iowans their car
is their most valuable asset. Car title loans put this asset at
risk and Iowans are losing all of their equity to the
astronomical interest rates. For the unfortunate clients who
lose their car to repossession any excess equity they may have
built is eaten by the repossession costs and interest rate
The "financial emergency" that necessitated the desperate car
title loan for these consumers is rarely as short-lived as the
loan terms, so the interest quickly mounts as paying the loan
off with a balloon payment is commonly impossible. It will
appear that in a car title loan, you won't be able to escape at
Here are some guiding principles from an affordable loan term.
These should keep you away from car title loans as well:
*Establish Fair and Affordable Loan Terms. Title-secured loans
should be repayable in affordable installments rather than a
lump sum. Is your car title loan like this? Rates should be
limited, and lenders should be required to consider the
borrower's ability to repay
*Protect Borrowers After a Default. States should bar abusive
practices such as seizing cars without notice, pocketing the
difference between the sales price and what the borrower owes or
pursuing the borrower for even more money after repossessing the
*Close Loopholes to Ensure Consistent Regulation. States that
permit title lending should close loopholes that exempt some
loans from the law and ensure that laws apply to all lenders,
including those operating across state lines.
*Monitor Lenders Better. States should closely monitor lenders
through strong licensing, bonding, reporting and examination
*Ensure Borrowers Can Exercise Their Rights. Car title loan
borrowers should be able to sue title lenders and void contracts
that violate the law. Binding mandatory arbitration clauses that
deny borrowers a fair chance to challenge abuses in court should
About the author:
Simon Gelfand writes for www.ArticlesBase.com, read more about
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