Protect Yourself from Title Loans – Q&A with Ann Logue, MBA, CFA
What is a Title Loan?
A title loan is a loan against the value of your car. It’s usually a short-term loan. If it’s not repaid, then the lender has the right to the car. To ensure this, the lender installs a GPS and kill-switch device in the car to shut it down if the payment is missed.
Why such short terms?
The idea is that a title loan is meant for emergency funding. The borrower will take the money to handle a short-term problem, pay it off, and get on with life. The reality is that it is very difficult for borrowers to pay off the loan and fees in such a short period of time, so most end up rolling the loan over. That’s good for the lender, because it means more fees.
How do the typical title loan interest rates compare to rates of other short lenders?
Title loan rates are high — 300% or more in many cases — which is surprising given that they are secured by the value of the car. Usually, car loans have lower interest rates than many other consumer loans because the lender can take the car if the loan isn’t paid off. Even a clunker that doesn’t run has value to a scrap yard.
Title loan rates are high — 300% or more in many cases.
How does “Rollover” work?
A rollover occurs when the borrower can’t repay the entire loan plus fees. The lender simply extends the loan for another period, with another round of fees, so that the total is even higher. This can continue for months until the loan is finally paid off, and the fees end up being greater than the amount borrowed.
What happens when, ultimately, I can’t repay?
If you can’t repay, you lose the use of your car. If you’re late, you can lose the use of your car. The lender can shut the car down remotely, even while you are on the highway, which means you can’t use your car. And if you can’t use your car, you might not be able to get to work.
What’s the best course of action if I do get trapped in a title loan situation?
If you can’t pay off the loan, at least try to pay enough to cover the fees plus a little bit of the amount borrowed, if it looks like it’s going to roll over more than once, you may want look for another source of funds to pay off the title lender. You may be able to refinance at a lower interest rate and without the risk to your car.
Title loans are obviously predatory, why are these loans still legal?
Good question. Title lenders and payday lenders are really good at lobbying state legislators. That’s sad but true. However, the federal government’s Consumer Financial Protection Bureau is looking at new regulations on payday and title loans that may lead to changes. That would be good, wouldn’t it?
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