Have you ever driven by one of those “Car Title Loan” places and wondered what’s up? Hopefully, you never have to consider a car title loan but, just in case you are curious, here’s how they work.
AKA Pink Slip Loans
As you might expect, a car title loan is a loan where you pledge your ownership in a car for some quick cash. The companies that do this present themselves as an option for clients who are involved in financial emergencies. The mechanics of the loan are simple: you hand over your car title, or “pink slip,” to the company and they give you some cash. Typically, your credit score or even employment are unimportant to these lenders. They just want the title to a hard asset, which in this case is your car.
We found a good example of a car title loan on the State of Montana website. Here they present a fictitious borrower who gets a $1000 loan from a title loan company. The terms of the loan are that the borrower needs to pay back $1250 in 30 days. If they can’t make this payment, they could pay just the interest, which would be $250 in this example. But then the borrower would still owe $1,250 at the end of the next 30 days.
Seems like a relatively high interest rate, doesn’t it? $250 after just 30 days. Well, that’s the point. These car title loan companies are legitimate companies but they are in business to make money off those in desperate circumstances. Let’s be honest, these are predatory loans where borrowers often lose their car because they can’t keep up with interest payments; interest payments that might be more than 400% annually.
Support from The Industry
Of course, those that represent these title loan companies say they fill a critical need. Eli Lehrer from the Center on Finance, Insurance and Real Estate, offers this: “It’s a good way for people with few assets to get money and, in many cases, can be less expensive than the alternatives.” Lehrer further notes that he had a friend who was college-educated but out of work and desperate for money to pay his rent. He took out a car title loan but eventually paid it back.
Consumer Advocacy Groups Disagree
“Title loans are predatory because they’re made to people who have little ability to repay them,” says Leslie Parrish of the Center for Responsible Lending. “Repaying a Title Loan in 30 days is nearly impossible. Car title loans are typically rolled over eight times before the loan is repaid or the car is repossessed,” Parrish says. We asked our consultant at of Baltimore, MD for an opinion and what we heard wasn’t surprising. To them, the whole Car Title Loan business is somewhat shady and they recommend doing your homework before you consider one.
Anyone considering taking out a car title loan should ignore the convenience of the loan and exhaust other sources for cash first, including borrowing from relatives. Bottom line is 30 days is an extremely short period of time to repay a loan. Furthermore, consumer advocacy groups warn consumers never to use a car title for a loan if that vehicle is their only way to get to work, school or medical care. The reason is simple: If a borrower defaults, the title company repossesses the vehicle.