Title Loans: Friend or Foe?

Title loans, or loans secured by a clear auto titles, have grown in popularity in recent years. The “Great Recession” that began in 2008 led to reduced credit availability for consumers as banks tightened credit standards. Millions of credit cards and other revolving credit accounts have been closed as a result. This credit contraction has dramatically increased consumer demand for all types of non-traditional lending, and title loans are no exception.

Popularity does not equal good value, however. While a title loan can be an easy and quick method of obtaining cash, there are significant drawbacks to this style of lending. Most title lenders will provide cash the same day based on the value of your car, and in most cases they do not run a credit check. This fast and easy process can seem very attractive to borrowers, but more careful consideration points out significant issues with title lending that are not in the borrower’s favor.

Perhaps the greatest concern is interest rates. Title loans are most often very short term, usually 12 months or less. Lenders typically highlight the monthly payment or monthly interest cost. They leave the actual interest rate being charged, or Annual Percentage Rate (APR), for the fine print. In reality, annual interest rates for these loans frequently fall in the 200-300% range. This level far exceeds rates that can legally be charged by traditional banks, and most analysts would agree they represent predatory lending that is damaging to consumers. Looked at in simple terms, if the APR for a title loan is 200%, the borrower has to pay back the amount borrowed plus an additional two times that amount in interest over the one year term of the loan. That is far from reasonable or affordable.

Another drawback is fees that are charged in addition to interest. The description of these fees varies, but in most cases they are simply additional profit for the lender on top of the exorbitant interest already being charged.

Finally, the very nature of a title loan itself is potentially damaging to the borrower. Most lenders will only lend a small fraction of the actual value of the car, limiting the amount of cash available. More importantly, if the borrower is unable to repay the loan as agreed, the lender can legally take title to the car. They can then sell it for full-value, more than recouping the loan balance.

Clearly, when it comes to title loans, the cards are stacked against the consumer. This type of lending should only be viewed as a last resort, and smart consumers should find more prudent means of saving and traditional borrowing to cover life’s unexpected expenses.

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