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Car Title Loans Offer Risky Cash
Payday loans have received a lot of negative press lately as
states and municipalities try to regulate an industry that
legally lends small amounts of money at interest rates that can
reach a breathtaking 1000% per year. A less well-publicized
variation on the payday loan is the car title loan, which
requires the borrower to provide his or her automobile as
collateral for the loan amount. While this type of loan is not
as widely publicized as the payday loan, the car title loan is
even more dangerous, as it could cost the borrower their car!
Payday loans, also known as cash advance loans, are
unsecured loans. The lender trusts the borrower to pay back the
money within two weeks. This type of loan is risky for the
lender, but that risk is more than offset by the high interest
rates charged for the loans, which can easily top 400% on an
annualized basis.
A car title loan works differently,
however. With this type of loan, the borrower offers his or her
car as collateral and is often asked to provide a spare set of
keys when the loan is granted. Should he or she default on the
loan, the car will be forfeited and sold to repay it. In some
states, the lender may sell the car and keep all of the proceeds
from the sale, even if they exceed the value of the loan.
With collateral, one would think that the interest rates
for
such loans would be far less than for payday loans, but that
is not the case. Nationally, interest rates for auto title loans
average about 300% per year, which hardly makes the loans a
bargain. In addition, the loan amounts rarely represent more
than a fraction of the value of the vehicle. A loan of even half
the vehicle's value would be regarded in the industry as quite
generous.
The same sorts of problems that occur with
payday loans also happen with title loans. The borrower is often
unable to repay on time and must extend the loan by paying an
additional fee. Under some circumstances, it is possible for the
fees to eventually exceed the value of the loan itself. And
unlike other loans, the borrower is under pressure to avoid
losing their car.
This type of loan is overwhelmingly
weighted in favor of the lender, who will end up with something
of far greater value than the loan should the borrower forfeit.
Those who have short-term cashflow needs would be well advised
to borrow from friends, relatives or a credit card instead.
About the author:
©Copyright 2006 by Retro Marketing. Charles Essmeier is the
owner of Retro Marketing, a firm devoted to informational
Websites, including LemonLawHelp.net, a site devoted to
information regarding lemon laws for
automobiles.
Written By: Charles Essmeier