In today's society, borrowing money seems to be inevitable. No one pays cash for their car or their home any more; no one can afford to do so. As a society, we borrow. We take out loans from banks, credit unions and credit cards. If we don't have good credit, we take out payday loans - short-term loans that have average interest rates of 400% or more per year. If we can't manage that, we resort to something even worse - a car title loan.
Payday loans are short-term loans, usually two weeks in duration, that let consumers borrow money in the $100-$500 range. The loan comes with a fee, which is actually disguised interest, that ranges from $10-$30 per $100 borrowed. $15 is average; that amounts to an annual interest rate of 391% per year. If the loan isn't repaid in two weeks, the borrower can extend the loan for another two weeks by paying the fee a second time. Some states permit consumers to "roll over" their loans a half a dozen times or more. If the borrower cannot repay, there is little recourse on the part of the lender, as the loans are not backed by collateral.
Car title loans are different, and generally a worse choice for consumers. In exchange for a loan of a similar amount, a few hundred to perhaps a thousand dollars, the borrower does put up collateral in the form of their car title. The borrower offers their car to the lender in the event that the loan is not repaid in a timely manner, which for such loans is usually 30 days. If the car is repossessed for failure to pay, the lender may sell the car to recoup the loan amount. Most states require any additional funds from the sale of the car to be returned to the borrower, but some states permit the lender to keep it all.
One might think that offering collateral for a loan would dramatically lower the interest rate. After all, the lender isn't really risking anything, so the loans should be about the same price as a credit card loan. They are not. In fact, car title loans are almost as expensive as payday loans, and average about 300% per year. Such loans are a great deal for the lender, who sees huge interest rates while taking no risk, and a bad idea for the borrower, who risks losing their car while still paying sky high interest rates.
Most consumers have only one form of transportation - their car. If they lose their car to an unwise loan, they have no way to get to work. Without a way to get to work, they cannot ever hope to repay the loan before the car is sold. Making matters worse is that having no way to get to work makes it difficult to earn money to buy another car. Car title loans are a bad risk, and putting your car up as collateral to borrow $500 is a poor financial choice.
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