Contributed
According to the Pew Charitable Trusts, over 2 million Americans take auto title loans annually. The report also indicated that only a quarter of the car title loan borrowers use their loans for emergencies. Half take the loan to cover regular bills., With this trend, it comes as no surprise that six to eleven percent of the borrowers have their car repossessed as they fall back on payments.,
What is an auto title loan?
, It is a short-term loan, issued to car owners, with the car title as collateral. The amount loaned depends on the market value of the car but will hardly go beyond 50% of this value., The borrower has to be willing to hand over the car’s title to the lender until the amount of principal and interest is fully paid. In case of default, the lender can sell the vehicle to recover the outstanding amount. Some lenders go as far as putting a GPS tracker in the car making it easy to track the vehicle in case, they need to repossess it., The interest rate of title loans is averagely 25% per month. This rate translates to an annual percentage yield (APR) of 300%, making it a costly form of credit. In addition to the high interest, there are expensive fees that can average $1200 yearly, for a $1,000 loan., In spite of this, car title loans are popular for two reasons:, 1) The lender has no interest in the borrower’s credit score, 2) The loan is processed very fast. The borrower can receive the loan in under fifteen minutes., Although car title loans are typically taken for 30 days, most borrowers being low-income earners hardly pay within the given time limit. The interest accumulates despite making partial payments that take almost half of the average borrower’s salary., In a bid to avoid repossession of their vehicles, the borrowers renew the loans from the same lenders in what is called rolling over. They take a brand-new loan for 30 more days which comes with additional fees. What results is a never-ending cycle of debt., A study by the Consumer Financial Protection Bureau showed that nearly 90% of auto loan borrowers reborrow within 60 days of paying their previous amount., Car title loans are classified as predatory and dangerous to consumers for a number of reasons:, 1) They have exaggerated annual interest rates., 2) They target those who are desperate., 3) The rate of default is high., A single car title loan is enough to keep you trapped in a web of debt, and you are likely to lose the vehicle eventually. Here are a few reasons that make borrowers fall prey to predatory lending.,
Ignorance of the Available Options
, Most people will take the nearest available lender to obtain a loan or use an online lending website like realisticloans.com to find a good lender or use recommendations from friends and family. They are quickly enticed by the attractive billboard adverts with misleading promises or TV adverts showing happy borrowers who give biased reviews. They hardly take time to shop around for cheaper options., With a car title and source of income, most credit unions can offer you a collateral loan at a friendlier rate despite having a poor credit score. Peer to peer lending is also a cheaper option with high approval rates.,
Poor Understanding of the Loan Terms
, Most people get into loans without understanding the terms. They rely on what the lending company’s representative says which at most times is misleading. He is likely to leave out the most crucial details such as loan fees which is an added cost., Thoroughly read and understand the terms before signing the contract. Where it’s not clear, seek clarification from the lender or legal counsel. Be aware of the loans governing auto title loans in your state. Most lenders will quickly ignore these laws at the slightest sign of ignorance from the customer.,
Misuse of the Loan
, Due to the speed in processing, an auto title loan is suitable for emergencies and when you are expecting a guaranteed payment in a month or less time. Most people, however, take car title loans to meet daily expenses., The loan may help cover the current month’s expenses, but it’s an added financial burden in the subsequent months when the loan payment is expected. The individual thus ends up in a worse financial situation than they were before and will take loans from other sources resulting in a spiral of debt and loss of the asset.,
Poor Financial Planning
, Most Americans are always in debt due to poor financial planning. The debt takes a large chunk of their income resulting in a situation where they live from hand to mouth with no savings whatsoever or means to handle a crisis. With poor credit reports, their main source of credit becomes the infamous car title loans., According to a study by the Northwestern Mutual, two in every ten Americans use fifty to a hundred percent of their monthly income on debt repayments, and one in every ten Americans is expecting to spend the rest of their lives in debt. With proper budgeting and reduced spending, you can avoid such situations.,
How Can You Get Rid of The Debt Spiral?
, If you are a victim of the debt spiral that results from auto title loans, it’s not all doom for you. You can disentangle from the mess by taking control of your finances. Here are a few tips to get you started., Find a side hustle, Get an extra source of income to cover the financial shortage caused by an inadequate salary. An additional source of income offers a permanent solution unlike borrowing more to cover a due loan. Create a plan to repay the outstanding balances., Improve your credit score, Until you make an effort to improve your credit score, falling back into the hands of car title loaners during emergencies is easy. Pay bills on time and keep your credit utilization low. With time your score will improve making you eligible for bank loans with standard rates. , Get a credit card, Credit card borrowing is not the best form of credit; but compared to car title loans, it’s a better option that carries no risk of repossession of assets. However, you need to be responsible with your credit card usage and save it for emergencies only., Live according to your means, Most people want to ‘keep up with the Joneses’ even when it’s straining their pockets. They use any available form of a credit to finance these lifestyles and keep up appearances. When facing financial difficulties, live according to your means and keep expenses at a minimum. Spend only on necessities and use the extra to pay off your debts. , Create an emergency fund, Financial experts advise that you should have at least three to six months’ worth of your living expenses in an emergency savings account. Sadly, a survey by Bankrate showed that sixty percent of Americans cannot handle a $1,000 emergency from their savings. Thirty-four percent would finance it using credit., Credit is not the only source of funds, As revealed by the survey report from Bankrate, most people with no emergency fund rush to take credit for every unexpected expense. Get creative in making money. Rather than take an auto title loan, sell your car, buy a cheaper model and use the difference to fund your emergency. Alternatively, sell a few household electronics, you can always replace when things get better.,
Final Words
, Getting a car title loan is a bad idea. The inflated interest rates coupled with high fees leaves you in a worse financial situation than you were before getting the loan. You end up taking up other loans in an attempt to save your vehicle from repossession or renew the loan from the same lender. In most cases, you still lose the car despite all efforts., Budget for what you earn and live according to your means. Create an emergency fund, find means to earn extra income, and try to improve your credit score. Always gauge the pros and cons of different forms of credit before settling for a lender and study its terms carefully. Borrow from friends and family if you can or sell your car instead of losing it to an auto title loaner., If getting your finances in order seems to be impossible, try getting help from a credit counsellor. A counsellor can help you take control of your finances and avoid falling into the trap of car title lenders.