(AOL Autos) – Cash advances are not a new concept in the brand of American capitalism. A lot of people have seen the ads with a guy barking, “Bad credit, no credit, no problem! Or, “Don’t worry about the credit, I own the bank!”
In addition to the high interest rates, these auto title loans usually include a number of fees that add up quickly.
Anytime a guy tells you he owns the bank, run.
Even though these lenders have been around for a while, signing your car for a high interest loan has become a serious financial problem.
For those of you who are not familiar with the concept of auto title loans, allow us to explain.
Sometimes the best of us are strapped for cash; we may not have credit or bad credit (as they say in the ads), which makes it difficult for us to get small loans from a bank or some other more traditional way.
A title loan offers you money from the lender, in return you sign the title of your paid car to secure the loan. Typically, these loans are due in full 30 days later. There is no credit check and only a minimum income check.
It sounds simple enough, but borrowing in these places can lead to repossession of your car and a lot of financial problems.
Interest rate that makes credit card companies blush
Auto title loans have been lumped into the category of “predatory loans” by many consumers. Nonprofits such as the Consumer Federation of America (CFA) and the Center for Responsible Lending have published detailed reports describing some of the securities lending issues the public should be wary of.
One of the biggest issues with these loans is the interest rate. Many people dislike credit card interest rates, which average between the mid to upper teenage years for most Americans. The interest rates on car title loans make complaining about credit rates seem ridiculous.
Auto title lenders are a different category from credit card companies or banks and circumvent usury laws. Thus, title lenders are able to charge three-digit Annual Percentage Rates (APRs). Yes, three digits. It is no exaggeration to see 250% APR and more on these car tile loans and only a handful of states have passed strict laws that prohibit sky-high percentage rates.
Under federal law, property title lenders must disclose interest rates in annual percentage terms. If you need to get a title loan make sure they don’t just give you a monthly percentage rate quote, they have to give it to you as an APR. If they’re not clear on rates, which many may be, just know that a 25% monthly rate equals 300% APR.
Fees and interest only
In addition to the high interest rates, these auto title loans usually include a number of fees that add up quickly. These include processing fees, document fees, late fees, setup fees, and lien fees. AOL Autos: the safest cars
Sometimes there is also a roadside assistance program that borrowers can purchase for a small fee. Some lenders have even gone so far as to make roadside assistance compulsory. The cost of all of these fees can range from $ 80 to $ 115, even for a $ 500 loan.
Most of these fees are legal, except for one that lenders sometimes charge, the repossession fee. Lenders aren’t allowed to charge you for the trade-in of your vehicle, but some still do. AOL Autos: the best vans
As if high interest rates and a mountain of fees weren’t enough, lenders also offer borrowers the option of paying only interest for a set period of time. In these cases, the loans are usually put in place for a longer period (compared to the usual 30 days) and the borrower can only pay the interest on the loan.
These types of payments are called “balloon payments” where the borrower pays the interest on the loan each month and at the end of the term he still owes the full loan amount.
The CFA reported that a woman paid $ 400 per month for seven months with an interest-only payment deadline on a $ 3,000 loan. After paying $ 2,800 in interest, she still owed the original $ 3,000 by month eight. AOL Autos: The Most Popular Crossovers
Reversal and repossession
If you think that most of the people who take out these loans will pay them off in full after a month, think again. Due to the high interest rates and the fact that these lenders cater to low income borrowers, many people are not able to repay their loans within 30 days. This is called the “renewal” of the loan.
The terms of these loans are designed to keep borrowers in a cycle of indebtedness and bring customers to the brink of recovery or actual recovery. Not being able to pay off the original loan and then renew it the next month costs borrowers even more money in interest, on top of the original amount they have already borrowed. AOL Autos: Used luxury cars
Let’s talk about repossession for a minute. The CFA reported that of those polled in their 2004 study, 75% had to give title lenders a copy of their car keys. Some companies started the cars to see if they worked and took photos of the vehicle even before a customer filled out the loan application.
An Arizona-based company said it has installed GPS systems on cars so it can track cars and turn them off remotely if they don’t receive payment on time. It might be an extreme case, but these lenders take a customer’s pledge signing very seriously. If you can’t pay, they’ll come and pick you up and your car.
The concerns about repossessing your car are obvious. How do you get to work, drop the kids off at school, go shopping or go out on weekends without a car? As if those scenarios weren’t bad enough, owning a car can be some people’s biggest financial asset. If the car gets swept away, so does the money it was worth.
Some states have laws that require lenders to pay you the difference on the loan after a lender repossesses and sells your car, but some do not. It is possible to default on the loan and not get money back for your car, even if you only borrowed a few hundred dollars.
This happens because auto title loans are also over-secured. Typically, the maximum amount most lenders will give you is 25-50% of your car’s actual value. However, if you can’t pay off the loan, they might be able to sell your car and keep 100% of the profits. Some lenders will not take possession of a vehicle but instead sue the customer for the money. They then add legal fees and finance charges to the existing loan amount.
Many auto title lenders defend their business practices by saying that they offer loans to people who otherwise could not get financial assistance. While this may be partly true, giving away one of your most valuable assets for several hundred dollars isn’t the only option.
Some credit unions, like in North Carolina, started providing low-interest loans of around 12% APR, a fixed 31-day repayment plan (to avoid rolling over a loan), and implemented a direct deposit from the borrower’s paycheck. so that the loans are repaid in full.
Other options may be cash advances on your employer’s paychecks, cash advances on credit cards, emergency community assistance, small consumer loans, or borrowing from friends or family. family members.
If you are considering a car title loan, check out these alternative options and read the information for yourself at www.responsiblelending.org or www.consumerfed.org. If you still need to sell your car for cash, educate yourself about the decision and the possible repercussions of these types of loans.
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