Payday loans has received a large amount of negative publicity, as state and municipalities attempt to regulate a small lending industry at interest rates that can reach an astonishing rate of 1000% per year. One less well-known variation on payday loans is the auto title loan, which requires the borrower to provide his or her car as collateral for the loan. Although this type of loan is not as widely advertised as a mortgage loan, car title loans are even more dangerous, which can cost the borrower their car!
Payday loans, also known as cash advance loans, are unsecured loans. The lender trusts the lender to repay the money within two weeks. This type of lender is risky for the recovery, but that risk is more than offset by the higher interest rates charged on the loan, which can easily rise to 400% on an annual basis.
Seizing the car
However, a car title loan works differently. With this type of loan, the lender will offer their car as collateral and often ask for an additional set of keys when lending. If he or she has defaulted on the loan, the car is taken away and sold for repayment. In some states, the lender can sell the car and retain all the proceeds from the sale even if the loan exceeds the value.
With the Guarantee, one would think that the interest rate for such loans would be much lower than for a payday loan, but it is not. Nationally, interest rates for auto title loans are typically around 300% per year, so that is not a bargain. In addition, loan amounts rarely represent less than a car’s value. Getting a loan at half the value of the car is considered fairly generous in the industry.
Problems with day-to-day debt also occur with title loans. The borrower is often unable to pay back on time and must extend the loan by paying an additional fee. In some circumstances, fees may eventually exceed the value of the loan. Unlike other loans, the borrower can’t avoid losing their car.
This loan will be heavily weighted in favor of the lender and will provide a greater value than the debt the borrower owes. Those with short-term cash flow requirements are advised to borrow from friends, relatives or credit cards instead.