A title loan is a type of short-term lending in which you surrender your car title as security in exchange for a loan. If you do not pay the loan within the specified period, the lender has the option to seize your automobile as payment.
The loan is due in a flat payment, generally 30 days later, or in instalments over a 3-6 month period. Typically, a balloon payment is made at the conclusion of the loan period.
Title loans do not require a credit check or evidence of income, and they are extremely quick to process; you may simply walk in with your car title and walk out with cash. Doesn't it seem appealing? Except that they aren't!
If you are thinking of getting one, here are several reasons why you should steer clear of title loans.
You May Lose Your Car
This is exactly as it sounds. When you use your automobile as collateral for a loan, failing to repay gives the lender ownership of your vehicle. According to the Consumer Financial Protection Bureau (CFPB), one out of every five automobiles utilized for title loans is repossessed.
This implies that with a title loan, you have a 20% chance of losing your automobile. How many elements of your life will this have an impact on?
You Risk Increasing the Cost of Borrowing for up to 3 Times your Initial Loan
Title loans have an average annual percentage rate (APR) of 300 percent. APR is the percentage of income that your loan should cost you if it is outstanding for a year.
If you are unable to repay your loan by the end of the term, you can have your vehicle repossessed or seek a roll-over. A roll-over is a fee-based extension of the payment period.
You may have to keep rolling over your loan because you have greater sums to pay presently. If you do it for a year, the total cost of your loan in interest and charges might reach 300 percent, which is three times the amount borrowed.
You might still be in Debt if your Repossessed Car fetches Less!
If you thought losing your automobile was the worst thing that could happen, think again! Your vehicle is appraised before you are approved for a loan. Failure to pay results in repossession, after which it is sold. There are times when an automobile is sold for less than its true worth.
This might happen if the car's market value falls or if the lender is unable to locate a buyer willing to pay the original amount. They sell it to the highest bidder, and in some places, you must assume the remaining amount. However, if the automobile sells for more, depending on where you live, you may not receive the surplus.
While taking out a title loan is something you may do on your own or as a family, it is crucial to assess the risks against the rewards. There must be a compelling reason why title loans are prohibited in 25 states. Make the best decision based on your knowledge.