Consumers complain, and rightfully so, about credit card interest rates that average 19% per year and go up from there. Those rates are certainly higher than those charged by banks, were personal loans can often be had at half of that rate, provided that your credit is good. On the other hand, credit card interest rates are bargains when compared to those charged by payday loan companies, where interest rates can often exceed 400% per year. Consumers usually take out such loans, which require repayment in two weeks time, only when they have no other lending options available to them, such as when their credit card balances are full. Four hundred percent per year sounds completely insane, until you consider that there is a form of lending that is potentially even more expensive the car title loan.
Car title loans work much like payday loans and have similar terms. Payday loans are short-term loans, usually two weeks in duration. The borrower pays a fee, which amounts to interest, that can average between $15 and $30 per $100 borrowed. If the loan is repaid in two weeks, the loan is retired. If the loan is not repaid, the borrower can usually renew it for another two weeks by paying the fee a second time. This is known as rolling over the loan. These loans have no collateral required; proof of a bank account and steady employment is usually enough to secure the loan.
Car title loans differ from payday loans in that the loan is secured by the title to the borrowers car. The duration of the loan is typically 30 days rather than two weeks, but the loans often work the same way. At the end of the loan period, the borrower can either repay or roll over the loan for another month. The difference, and it is a big one, is that failure to repay a car title loan allows the lender to repossess the borrowers car! At that time, the lender may sell the car and keep they money that they are owed. Most states require the lender to return any extra funds, but some states actually permit the lender to keep all of the money.
One would think that by requiring collateral in the form of a car title, the lenders could offer loans at a more affordable rate than those offered by payday lenders. They probably can, but in practice, the interest rates are very similar, which makes a car title loan a very risky way to borrow money. Most people need their car to get to their job; if your car is gone, so is your opportunity to repay the loan or to buy another car.
Lawmakers in various states have been trying to crack down on the growing car title loan industry, but they often meet with resistance from industry lobbyists and Republican legislators who think that the free market should decide how lending businesses work. Unfortunately, the free market is not available to most car title borrowers, who only go to such lenders after they have exhausted all other borrowing avenues, such as banks, credit cards, and even payday loans.
The bottom line is this No matter what the interest may be, putting up the title to your only means of transportation as collateral for a $500 loan is a bad idea.
