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Car Title Loans: A Debt Trap

by Laura Varela / January 26th, 2022


Car title loans or “fast auto loans” are popular with people looking for quick access to cash, but they can also put you in a deep well of debt. Car title loan companies squeeze nearly $4 billion dollars from consumers each year in fees alone! Twenty-two states still permit this debt trap, which puts one of consumers' most significant assets on the line.

Here's how car title lenders work. They make short-term loans without evaluating whether the borrower can repay the loan. The decision is made instead on the value of the collateral—in this case, the car. Typically, there's no credit check, nor does the lender ask about other monthly expenses or debts. The borrower must pay a monthly finance fee of about 25% of the amount being borrowed, which translates to an Annual Percentage Rate (APR) of 300%. If the borrower can't make the payment, they risk losing the car.

For example, say you want to borrow $1,000 for 30 days. The finance fee is 25% of $1,000, or $250. You give the title loan company the title of your car and they give you $1,000. Some lenders may even require the installation of a GPS and starter interrupt devices so they can locate your vehicle easily and prevent you from hiding it from them.

At the end of 30 days, you have three choices: Pay $1,250 plus any other fees the lender may charge, roll the loan over into a new one, or lose the car.

If you can’t pay the $1,250 and choose to roll the $1,000 loan over for another 30 days, you must pay another 25% finance fee ($250). This brings your total payment to $1,500, ($1,000 + $500 in fees) which is due at the end of 30 days.

Many borrowers end up rolling the loan multiple times, unable to pay off the initial small loan, and accumulating enormous debt from fees.

Keep these tips in mind before giving away your vehicle:

  • Focus on the APR. Car-title loan APR rates range from 84% to 300% and higher. If you focus only on the "fast and easy" aspect, you can get trapped into an endless cycle of debt.
  • Shop around. Ask the credit union what other options are available for your situation. Credit unions offer many kinds of loans, with much better rates than the “quick cash” variety. They will look for the best option that can address your current financial need with the least financial stress.
  • Steer clear of all predatory loans. That includes payday loans, tax refund anticipation loans, and overdraft loans. These lenders make their money by keeping you in debt. Don’t make it easy for them.
  • Boost your emergency fund account. Having a special savings account just for emergencies will provide the quick cash you need for unexpected expenses. Consider automatic transfers from your checking to the savings account to make it easier. Let us know if you need help opening a savings account or setting up an automatic transfer.
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