The Good, the Bad and the Ugly of Auto Title Loans

Cowboy hat on car
Auto title loans are very common these days as a result of economic pressure brought about by the recession. Since the recession began, job loss, foreclosures and tighter budgeting have become all too common.

People, from the desperate to the financially uncomfortable, have been forced to seek new sources of emergency cash. In conjunction with payday loans and credit card use, auto title loans have been a helpful form of financing for borrowers.

Auto title loans are a form of secured lending. In auto title lending, borrowers offer their vehicles as collateral to a lender. The quality and condition of a borrower’s vehicle is evaluated by a lender, and an amount in accordance to the value of the collateralized vehicle is lent out. Borrowers then have to repay their loan, along with interest, by an agreed-upon date.

If borrowers fail to repay then their lender will repossess the collateralized vehicle in order to recover the lost profit of the defaulted loan.

Like virtually all forms of financing, these car equity loans have a good, a bad and possibly even an ugly side to them.

The Good

Automobile title loans are not universally devastating to borrowers. If they were, they would have been banned long ago—like loan sharks, debtor’s prison, no-doc loans, and all other financially harmful mechanisms in the lending industry.

Car title loans can be a necessary form of debt depending on an individual’s circumstances. Vehicle owners who are hit with unexpected expenses, such as medical or legal bills, may need an extra surge of cash to carry them over until they can find their footing again.

Additionally, people with poor credit histories may find auto title loans to be one of the few financing sources available to them.

And finally, car title loans are arguably more beneficial than payday loans (another very popular form of short-term bad credit borrowing) since the fees and interest rates tend to be lower (though not always by that much).

The Bad

But unfortunately, these auto equity loans do have a less attractive side as well.

Due to some lenders taking advantage of desperate borrowers, many consumer advocates have come to consider auto title loans to be a form of predatory lending.

Unlike credit cards, which usually have interest rates between 10 and 20 percent, auto title loans are known to have towering interest rates in the triple digits. It is not uncommon to see auto title loans that have annual percentage rates (APRs) of 250 percent or more.

Adding salt to that wound are enormous fees. Car title loans are known to have massive processing, document, late, origination, and lien fees.

The Ugly

Unfortunately for borrowers, certain lenders can be downright ugly.

Lenders may offer borrowers the initially-pleasing option of making interest-only payments. As the name implies, borrowers simply pay the interest for a set period of time with these types of loans. However once a loan finishes the full amount of the loan is due. Needless to say, it is not uncommon for borrowers who borrowed under this option to regret their decision.

Roll-overs are also part of the ugly side of car equity loans. If borrowers are unable to repay their loan by the end of their loan’s lifetime, fees and interest on that loan accrue until they pay it off. This can lead to a cycle of debt if borrowers are not careful.

Worse still, vehicles can be repossessed if borrowers default. Once borrowers default, lenders can seize their vehicle and sell it to recover the cost of their loan. This can cause huge problems for borrowers since, without a vehicle, most will be unable to commute to work, school, or social gatherings.

Despite the good, the bad and the ugly side of auto title loans, they remain a common form of secured lending. Borrowers interested in putting their car up as collateral to borrow money have never been in a better position. Thanks to new online tools and information filled websites, borrowers can compare quotes and educate themselves before ever walking through their local lender’s door.