Car title loans often appear to be a real good option especially when you are strapped for cash. But you run the risk of losing your automobile that is placed as collateral. Auto title loans are expensive and highly risky. Check out the features of car title loans and how they can put you in a cycle of debt.
Car title loan
A car title loan is lent by finance companies that pay you a part of the value of the car. The automobile is used as collateral. According to the Consumer Federation of America, the typical interest on car title loans runs to about 300% annually. Besides processing fees of about $ 25 are charged. In most cases, the lenders hold a duplicate set of keys to the automobile.
The Damocles sword of repossession haunts the borrower of a car title loan. When borrowers of auto title loans find themselves unable to repay them, they tend to borrow elsewhere or roll over these outstanding payments thereby spiraling a debt trap. You may end up paying large interests to keep the loan from defaulting. In this case, hardly any amount is repaid on the principal.
Such auto title loans work much like payday advances – emergency short-term loans to tide over a crisis. Typically auto title loans are due within a month as a lump-sum payment. A borrower can avail anywhere from $250 to $1,000 or even higher by pledging his car's title. Often state laws allow this type of predatory lending schemes. The lender of the auto title loan may sometimes be entitled to keep all the proceeds from the sale of the forfeited vehicle, even if it exceeds the value of the car title loan.
Taking auto title loan
If you are considering going in for an auto title loan, read the fine print carefully before allowing the lender lien against your car title. Ensure that you have a pay back plan in place so that payments do not get out of hand. Remember that loans against your auto title are heavily weighted in favor of the lender. You will receive your car title document only after you have paid the principal and interest on the auto title loan.