When you borrow money based on the worth of your car, you are taking out a title loan. You go to a car title loan company, and a lender evaluates your car and gives you a loan based on the car's worth. You hand over the car's title until you pay back the loan. Title loans are available only in certain states, and there is a reason for this.
Legal in Some States
Generally, you need to own the car and possess the title to get a car title loan. As of 2011, 19 states allow title loans: Alabama, Arizona, California, Delaware, Georgia, Idaho, Illinois, Kansas, Mississippi, Missouri, Minnesota, Nevada, New Mexico, South Carolina, South Dakota, Tennessee, Texas, Utah and Virginia. The states that refuse to allow title loans put title loans under the predatory lending category because of the high interest rates title loan companies charge -- sometimes in the triple digits.
About Title Loans
If you need a loan to get you through a difficult time and you have bad credit, a title loan can be a good option for you, but you have to be careful and understand the ramifications. The loan you get is typically due in 30 days. If you are still having financial difficulties and are late with your loan payment, the title company can take your car. Each state varies regarding the particulars of the loan. In Georgia and Alabama, for example, a title loan is a particularly risky venture because those states treat your loan as a pawn, meaning that if you are late with your payment and the title company repossesses your car, the company can sell your car for more than what you borrowed and keep the difference.
A Typical Scenario
Car title loan companies realize that most people cannot pay back the loan in 30 days, so generally, the loan company allows the borrower to pay just the interest at the end of the 30 days and make the loan plus the new interest due the next 30 days. For example, say you borrow $1,000 at a 24 percent monthly interest rate. At the end of 30 days, you would owe $1,240. If you can't pay that, the title loan company typically allows you to pay the interest of $240 with the balance of $1,240 due in 30 days. Title loan companies generally let borrowers roll the loan over this way eight times, at which time the borrower either repays the loan or the company repossesses the car, Leslie Parrish of the Center for Responsible Lending told Edmunds. If you do pay the loan off on the eighth month, on the $1,000 you originally borrowed, you would have paid back $2,920.
Bottom Line
A great divide exists on whether title loans ought to exist or not. People in the predatory loan camp want these loans abolished, calling the practice "legalized car theft," as Jean Ann Fox, of the Consumer Federation of America, referred to them on Bankrate.com. But Eli Lehrer, of the libertarian Center on Finance, Insurance and Real Estate, believes that car title loans are a good way for people with little assets and poor credit to get money. The alternatives to car title loans are usually worse, such as payday loans, pawn shops or loan sharks.
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