Title loans are short-term loans with high interest rates backed by a borrower's car as collateral. These loans are understandably tempting to those struggling with financial hardships, but experts say these loans should be avoided. By understanding the harsher realities of title loans, you can better avoid the temptation of quick and easy stopgap cash.
Repossession Risk
The primary reason to avoid title loans is the very real risk of your car being repossessed by the lender. Without access to a vehicle, your abilities to continue earning an income and running your life effectively could be jeopardized. Unless you go in to the title loan with an entirely reliable plan to pay off the loan fast, the same financial concerns that motivated you to get the loan could lead to you losing the collateral. Repossession can be initiated after the first missed payment, which can be scheduled as soon as two weeks after the initial loan.
High Interest Rates
Interest rates for title loans are much higher than most people realize, sometimes exceeding 300 percent APR. There is no federal regulation on the interest rates of this type of loan, and few states have started legislating their own restrictions. Even though there is no true need for interest rates on title loans to be that high, given that the loan is backed by a vehicle that is worth substantially more than any title loan, most title loan companies take advantage of an opportunity to gain additional profit. The astronomical interest rates can make it much more difficult to keep up with the loan payments, thus increasing the chances of the collateral car being repossessed or another high interest loan being taken out.
Predatory Lenders
While some title loan companies are reputable businesses providing a service, there are a number of other title lenders that are predatory. These predatory lenders incorporate complex and strict terms into their title loans that people in desperate financial situations either do not understand or don’t take the time to study. Terms in these less ethical loans set the borrower up for failure and eventual car repossession. The best way not to fall victim to a predatory title loan is to avoid this kind of loan altogether.
No matter how troubling a financial situation may seem, title loans should be avoided. There are other ways to acquire short-term loans that don’t require you to put up such valuable and essential collateral, such as small consumer loans and cash advances on a credit card.
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