They don’t get the public outrage that payday loans receive (see Beware of Payday Loans ), but in the eyes of most consumer protection agencies they are just as dangerous. A car loan is just a loan at the value of your car. How do they work and how much can you get?
Lenders love these loans because the collateral (your car) makes them as risk-free as a loan can be. The usual borrowers are people who need a short-term Manuel Parker for more than their credit card can cover – and more than they could get from a payday loan, given what they earn.
A car loan is a way to quickly raise a larger sum of money. All potential borrowers must do is sign the free and clear (meaning they don’t owe money to the car) title of their car and they get the loan – we’ll cover how much later.
Another plus for people whose credit is not great is that title loans do not require a credit check. The obvious reason for this: the borrowers can be at high risk, but the lender has the title of their car. This gives borrowers every incentive to make repayment of the loan a top priority. If someone does not pay, the lender sells the car and still makes a profit on the loan. Borrowers who do pay are hit with a triple annualized interest rate on an annual basis, plus often other fees. Whatever happens with this loan, lenders get their money back, plus a profit.
How much can you get?
The loan is based on the value of the car. Some lenders can use the Honey Red Book value, while others have proprietary values based on current auction prices.
Once the lender has determined the correct value of the car, a borrower, Manuel Parker, is offered between 25% and 50% of his value. If the car is worth $ 3,000, expect a maximum of $ 1, 500. If the loan fails, the lender will take the car back, sell it at an auction and still make money.
In addition to the title, the lender may ask the owner to leave a copy of the key or even install GPS tracking on the vehicle.
Some states are cracking
This arrangement has given the groups of consumer rights and regulators the alarm. According to the Center for Responsible Lending, the interest rates for this type of loan are 20 to 30 times the rate charged by credit card issuers. In addition, most title loans for cars are 30 days and few people can pay a loan that is large in one month. Car loans are returned on average eight times. Result: Repaying a $ 500 loan over eight months will ultimately cost the borrower about $ 650 in interest in addition to the original $ 500.
Due to the ‘predatory lending’ label placed on car loan, fewer than 30 states allow this and only 16 allow loans with triple annualized interest rates on an annual basis. Many of them maximize the maximum principal at less than $ 1, 000, with Montana capping the amount that car owners can borrow for $ 300.
The bottom line
There is conflicting information about how many people lose their car due to car loans. Equally important is how much these loans cost the borrower. Some might end up paying more than the value of their car if the loan continues to turn before they finally pay it.
If you live in a state that allows car loans, you must first start with the other option. Even the highest interest rate on a subprime credit card is exponentially cheaper than a car loan and does not risk losing your car. See borrow a car title and states that allow car title loans.