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Car Title Loan - How Does It Work?

Updated on December 18, 2017

Anyone who knows how a car title loan really works would not want to get themselves into a car title loan.  Though there are many who turn to borrowing or getting a loan when faced with the need or want for cash, it is my purpose in writing this hub to give a warning light to those who are specifically thinking of getting a car title loan or for any kind of title loan for that matter.

Image by Ken Teegardin, CC BY-SA 2.0
Image by Ken Teegardin, CC BY-SA 2.0 | Source

How Does A Car Title Loan Work?

A car title loan is sort of a small emergency loan where anyone who applies for it uses his car title and a copy of the car keys as collateral in order to borrow some cash from a lender. Usually, no credit check is required and income verification is minimal. If you're familiar with a pawnshop, it sort of functions in the same way.

Though this loan is very attractive to borrowers especially those who have no credit or bad credit, there are very obvious reasons for shunning away from such predatory lending. Knowing something about the terms of car title loans will give us an idea as to why it is not a very smart option for borrowing cash.

Quick Due Date - Being categorized as a short-term loan, car title loans are to be paid in full in 30 days. If you cannot pay, you can opt to renew the loan for a fee but it will bury you deeper and deeper into a cycle of debt and can eventually lead to the repossession of your car.

High Interest Rates - If you think that a credit card interest rate as high as 25% APR is already too much of a burden, then just knowing that car title loans can carry with it an annual interest as high as 300% should be enough to dissuade anyone from applying for one. Who can ever afford to pay loans with such a usurious rate?

Low Cash to Car Value Ratio - The amount of loan you get in this deal is only about 30-50% of the actual value of the car.  What is there to gain but the momentary availability of a little cash which you have to pay 30 days later. If you are able to pay off what you have borrowed plus an interest of about 25% in 30 days, well and good. To give a sample computation, let's say you borrowed a $1000 car title loan. In 30 days, you have to pay a total of $1250.  You may renew this loan for another 30 days if you cannot, then another  and another until the payable amount balloons to $3000 in one year. Then, If you default, you end up losing the valuable car that your family really needs.

A Better Deal - Avoid Car Title Loans

In view of the above information, how can a person have a better deal when the situation arises where he is in dire need of cash?

Now is the best time to use your savings if you have one. The ways of the ant still teaches a very relevant lesson for us today. Save what you can for the wintertime. Don't be like the carefree grasshopper who doesn't prepare for the future. One has to save not just for the expected but for the unexpected.

If you really way out of your means, let me say again, avoid car title loans, including all other predatory loans, no matter how tempting it is. Though it is one of the quickest ways to get cash, yet it is also one of the most difficult to resolve and you're always on the losing end.

Find other sources of cash, preferably those with lower interest rate and those which do not risk the possibility of losing your car. Personally, my first alternative is to borrow from someone I know, a relative or friend maybe, who would be kind enough to lend me some cash with a friendly interest rate. But other alternative sources where one can borrow some cash exist like advances from employers, credit union loans, emergency assistance programs, cash advances on credit cards and smaller consumer loans.

Additional Information - Car Title Lending Regulation

Among the findings of a study conducted by the Consumer Federation of America on car title loans in 2005 stated that

  • Rate regulation is necessary to reduce the price of loans;
  • Permissive state laws and lender exploitation of loopholes and gaps in protections leave vulnerable consumers exposed to high risk title loans; and
  • State laws set the stage for title loan debt traps by setting high maximum loan ceilings and permitting one-month balloon payments.

This study shows us how important the state laws play in protecting the consumers, especially those from the low-income group who are the most vulnerable, from title loan debt traps.

According to author Kristin Arnold, there is an estimated 15,000 title loan shops in the United States today. Of these, those which are in 16 states (Alabama, Arizona, Delaware, Georgia, Idaho, Illinois, Mississippi, Missouri, Minnesota, Montana, Nevada, New Mexico, South Dakota, Tennessee, Utah, and Virginia) allow car title lending at triple-digit interest rates and those in 4 other states (California, Kansas, South Carolina, and Texas) allow car title lending via a legislative loophole.

The consumer groups are still looking forward for some more positive action from other state legislators. It would be great if provisions for longer loan terms and more affordable installment repayment schedules for the borrowers are offered on car title loans instead of paying one lump sum amount in 30 days. Moreover, advocates are still hoping that interest rates would be capped or restricted and that borrowers would be provided some measure of protection in the event of default.


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      8 years ago

      Thanks. This should also answer people's questions.


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