Car Title Loans
How do Car Title Loans Work ?
Car title loans, as the name suggests, are obtained by using the car's title as collateral. A car's title is issued
by the Department of Motor Vehicles (DMV). This deed contains the name and address of the current
owner, make, model and year of the vehicle, and the date on which the vehicle was first sold. In case of
subsequent sales, the car title is handed over to the new owner, who obtains a fresh title from the DMV.
Hence, the car's title is a certificate of ownership, and can function as collateral, allowing the lender to sell
off the car in case of default. Some lenders expect the borrower to provide them with a copy of the car keys
in addition to the car's title. Car title loans are targeted at borrowers who have bad or no credit history, and
are in desperate need of instant cash. Generally, lenders provide between 20% and 50% of the market value
of the car, which they can expect to recover in case of default. These are short term loans that have to be
repaid within 30 days. The lenders are small, unregulated, non-bank financial institutions.
Disadvantages of Car Title Loans
High Rate of Interest: The Consumer Federation of America (CFA) and the Center for Responsible Lending,
caution people against car title loans, since these loans are supposed to set off an endless cycle of debt. This
is due to the high rate of interest charged on these loans by the lenders, who profit regardless of whether the
debtor pays or defaults. The monthly rate of interest on such loans is generally 25%. This in terms of the
annual percentage rate (APR) works out to a flabbergasting 300%. It is no wonder that the average borrower
finds it impossible to repay the loan. Most borrowers are people with a bad , who find the rate of interest on
their impossible to manage. Even a high interest rate on the credit card tends to be significantly lower than
the rate of interest on a car title loan.
Losing the Equity on the Car: The borrower invariably loses the equity on the car, due to his inability to
repay the car title loan. Since the lender only provides between 20% and 50% of the market value of the car,
on selling the car he gets to keep the equity that rightfully belongs to the borrower.
Fees and Rollovers: Car title loans carry a number of fees that benefit only the lender. Processing fees,
document fees, late fees, origination fees and lien fees increase the indebtedness of the borrower. Some
lenders also make the roadside assistance fee mandatory. If the borrower is unable to make the payment on
the due date, he would have to rollover the loan which again entails a fee.
Advantages of Car Title Loans
Credit History is not Important: Most borrowers are people who have bad or no credit history, which
effectively disqualifies them from obtaining short term loans or lines of credit from banks or charging the
expense to their credit cards.
Short Term Loans: The main advantage of car title loans is the easy availability of small amounts of money.
Most banks do not lend less than $1000 dollars. Moreover, these loans can be used to finance any
expenditure.
Most states have passed strict laws with the intention of regulating the market for car title loans. In the year
2007, 18 states passed a legislation with the intention of regulating this segment of the market. In 2008, 8
states passed similar laws with the intention to curb predatory lending practices. Since these loans carry a
very high APR, most states have also imposed a cap on the rate of interest that can be charged on a car title
loan. However, a person in need of cash should consider other alternatives before availing a car title loan.
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