Its interesting how car title loans and payday loan operations have been sprouting up just about everywhere.  With huge signs and even TV commercials promising quick, instant cash for your car title they are luring customers in droves.  So what exactly is a car title loan and is it a good thing or a scam?

Car title loans are similar to payday loans as they are emergency cash loans.  They are supposedly for when you are in a pinch.  Like when your checking account balance is drawn to zero and you need to pay some important utility bills or you need cash in your account so you won’t bounce some incoming checks.  The problem is that these loans tend to come with very high fees, interest rates and costs.  They also, unlike a payday loan, are secured to a vehicle title.  What this means is that if the borrower should ever become delinquent the title loan company can easily go and repossess their vehicle and sell it at auction to pay off what is owed.

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Basically a car title loan is made with a 1 month repayment schedule at the state maximum allowed interest rate (usually between 25% and 29%).  This works out to over 200% if the loan were extended yearly which would trigger most state usury laws which require the loan to be under the state maximum of 25% to 29% in most cases.  The way these car title loans get around these legal requirements is just like payday loans.  They are only for the time period allotted and then the borrower if they cannot pay it in full (which is almost always the case) then they must go back in and take out another with more fees and costs added to it.  This ends up in the loan amount continually increasing to the point where there is no possibility of repayment and then the vehicle attached to the loan is repossessed and sold off at auction.

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Once the vehicle that is secured to the title loan is sold off , the car title loan company can place any deficiencies in the value of the vehicle and the total amount owed (the loan, fees, late fees, collection fees, etc…) against the borrowers credit and attempt to collect on it.  The problem here is that with car title loans as with payday loans they make it all too easy for someone to fall behind and receive huge late fees and other costs and quickly go under with no hope of recovery.  It’s a literal goldmine for the lending company.  Where else can they get a secured debt with such a huge rate of return (200 to 300% per year)? 

Several states have stepped in due to the bad press associated with these very high cost loans and made these loans illegal and literally made car title loan companies exit their state.  So what do these loan companies do in retaliation?  They immediately go and set up shop all along the border in the next state and advertise heavily in the state where it is illegal.  This causes droves of people in the illegal state to drive to the adjoining state where they can get a title loan and get bamboozled. 

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Car title loans, however, do serve a purpose, they loan money that most other lenders and people would never do.  They give people money for emergencies, but at a very high price and they are secured by the lenders title and vehicle.  The borrowers need to know that there are low cost alternatives like friends and relatives or even Prosper the online lending community.  Someone with E or terrible credit can still get a loan on Prosper for a greater amount and it will be in the 20’s range for interest rate, but that will be yearly, not monthly like in a car title loan – and it won’t be secured to their car title!



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