A car title loan is a slithering can of worms that you really don’t want to open unless your very life depends on it. Title loans are considered the worst of the worst when it comes to subprime loans, which are high-interest, short-term loans marketed to people who don’t have the credit or the income to qualify for loans at reasonable rates. In other words, they’re marketed to the very people who can least afford to pay them off on time. It’s kinda like enticing someone with diabetes to eat a huge bag of doughnuts.
Car title loans, also known as title loans, title pawns, and pink slip loans, are usually processed and paid out within an hour of applying. Title lenders don’t check your credit, and while some require that you have some type of income – whether from a job, unemployment, or retirement – many lenders will accept a bank account with a little cash in it as proof of income. In most cases, all you really need in order to take out a title loan is an ID, the original lien-free title to a car in your name, and a spare set of keys. In exchange, the lender will give you somewhere between 25 and 40 percent of the value of your car, which you can keep driving as long as you don’t default on the loan.
What is a Default?
When a borrower fails to fulfill the terms that both the borrower and the car title lender agreed upon, this is called a default.
Some examples include:
- When the borrower missed paying on the agreed date
- When the borrower failed to give the agreed amount in time
- When the borrower did not follow specific rules indicated in the agreement
When a default takes place, the lender usually seeks the borrower to discuss what can be done. If the borrower fails to meet the lender or both parties fail to find a solution to remedy the situation, the lender has the option to take legal actions against the borrower or automatically repossess the car which title was used as collateral.
The Perils of Title Loans
When you live paycheck to paycheck like 76 percent of Americans do, little emergencies can seriously jack up your life. All is good until suddenly your car breaks down and needs $1,000 in repairs, which you don’t have, or the gas company suspends your service for that past-due $300, which you also don’t have. Unless you’ve got a well-to-do friend or relative willing to lend you the cash, you’re in dire straights.
Since your credit score, income, and current debt probably disqualify you from getting a traditional low-interest loan in an emergency, you may feel that you really have no choice but to hand over the title to your car and hope that you can pay off the loan before you wake up one morning to find your car gone. But the high-interest rates associated with these loans makes them a gamble that 17 percent of title loan customers lose.
The monthly interest rate on title loans is typically 25 percent, which is equivalent to a 300 percent APR, or annual percentage rate. The APR is the amount of money you’ll pay in interest if you carry a loan for twelve months. The term of a title loan is usually 30 days, at the end of which the principal plus interest is due. In the case of a $1,000 loan, you would have to pay $1,250 at the end of the term or pay only the interest and roll over the principal for another month, during which interest continues to accrue at the same high rate.
On average, title loan borrowers roll over the loan eight times. Total cost for a $1,000 loan at the end of eight months? A staggering $3,000 plus any additional charges, which may include lien, origination, and document fees and, to add insult to injury once your car is repossessed, a repossession fee.
The Aftermath of Repossession Due to A Car Title Loan
If you default on your loan and the repo man pays you a visit in the middle of the night, you may have a few days or even a couple of weeks to come up with the required cash and negotiate the return of your car before it goes to auction, but that all depends on the lender’s auction schedule. If it goes to auction before you can get it back, the lender will recoup the amount you owe from the proceeds of the car’s sale.
And then what? Do they send you a check for what’s left over? Not if they don’t have to, and they don’t have to in states where title loans are governed by pawn laws, as they are in most of the 20 states where title loans are legal. You can default on a small remaining balance after paying three times that amount in interest and still lose your car and every penny of the equity you have in it. On top of that, you’ll have to come up with the funds to buy a new car.
What You Can Do
If you’re considering taking out a title loan to cover an emergency, don’t do it until you’ve exhausted all other resources first. Talk to family and friends about a loan, contact community or government agencies that have funds set aside to help people in need through various hardships, ask your creditors for an extension on payments due, or go the traditional route and pawn something of value that won’t leave you stranded and buried under a mountain of insurmountable debt if you can’t make the payments.
Only after you’ve explored every other avenue you can think of should you consider taking out a title loan, and even then, only after combing through your budget and finding ways to scrimp and save for the next month to ensure you’ll be able to pay off the loan at the end of the term.
If you’re already playing the title loan blues and are on the verge of repossession (or not,) make an appointment with a credit counseling service to find out what options may be available to you for getting your debt under control to avoid financial ruin.
What Happens to My Car After it’s Repossessed?
There are times when you can still come into agreement with your lender to give you some time to get the amount of money you owe. If your lender agrees to this, you may still be able to get your car back. You’ll usually get a repossession notice before they can claim your car.
At such time, you may need to discuss and negotiate for some extension. You may get an offer to renew your loan, but this can be tricky as you may end up falling into a cycle of debt. So be careful if you consider this path. Make sure you can come up with the money required on time.
Meanwhile, if you decide not to take any further action and your car has been repossessed by the lender, they will likely sell it at an auction to get the balance from your debt, possibly even more than that. If you defaulted on the loan, the lender is required to return the excess funds to you, so make sure that this is clearly stated in your terms of agreement when you sign it beforehand.