4 Reasons to Avoid Auto Title Loans

Auto title loans offer a way for borrowers with bad credit, that own a car, get a short-term loan with no money down. But, auto title loans are risky business. With little regulation, high rates and high risk, this is the type of borrowing a consumer should avoid.

Reason #1: Get a Little, Risk a Lot

With auto title loans, your fully paid car or truck serves as collateral for a small, short-term loan. Some lenders will offer loans as small as $100, others have a $1,000 minimum. The maximum loan amount is typically 50 percent of your vehicle's current resale value. The loans are easy to get and you can get the money you need in as little as 15 minutes.

Consider the risk for the return. Assume you have a truck worth $15,000 and borrow $1,500 against it. Now assume that for whatever reason, you are unable to make the payments. For example, you lost your job.  If you are behind on your payments for six months, the lender will repossess your truck. The lender will then sell your vehicle to pay off the balance owed on the $1,500 plus interest. The lender will, however, keep the entire proceeds of the sale. That means your $1,500 loan, just jumped to $15,000.

Reason #2: High Rates, High Risk

Auto title loans are typically 30 day loans and charge a rate of 25 percent on the amount borrowed. If you borrow $1,000, in 30 days you owe $1,250.

To put this in perspective, home loans typically range between 4 percent and 8 percent depending on market conditions. A personal loan or home equity loan might be 2 percent higher, or 10 percent per year. But on an annualized basis, auto title loans at 25 percent per month are 300 percent per year.

Reason #3:  Rollover Risks

Approximately 20 percent of auto title loans end up with in repossession. Many more borrowers end up behind on payments and dig themselves into a deeper hole of debt.

If you fall behind with your payments, the unpaid balance simply rolls over and is added to the amount due the next month. This larger amount - growing even larger month by month - accumulates at 25 percent interest. This means that once you start getting behind, things get worse, really fast.

Reason #4:  Little Regulation, Little Recourse

High risk is associated with auto title loans but it's important to remember that most borrowers are in difficult financial situations when they consider auto title loans. The loans are expensive and risky.  If a lender is not properly conducting business, there is little recourse with these loan options. There is no federal or national-level regulation of auto title loans.  

Auto title lenders operate in about half of the states, and state and local regulations are all that govern them. Regulations vary with each state. For the borrower, that means there can be widely varying levels of recourse if you feel you have been unfairly treated. The courts are always an option, but that usually is expensive.

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