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Why Car Title Loans Can Be a Bad Idea

If you have ever had financial issues and required money, you may have considered obtaining a high-interest loan by signing over your vehicle. When you are in need of cash and have bad credit or even no credit at all than you most likely won't be able to obtain a loan from a bank. As an alternative, a title loan can give you the money you need in return for you signing over the car title of your vehicle. Although you may think this is pretty straightforward, borrowing money from car title lenders can cause your car to be repossessed as well as a slew of other financial problems. Here are five reasons why car title loans can be a very bad idea.

Interest Rates

Car title loans are considered to be part of predatory lending by many people. Arguably, the biggest problem with this type of loans is the high interest rates that come with it. Car title lenders can charge annual percentage rates that are in the triple digits. Under federal law, car title lenders must disclose their interest rates through annual percentage. Due to this it is very important that you ensure you don't receive a quote from a car title lender for a monthly percentage rate, as this can cause you to think the interest rate is substantially lower than it actually is.

Fees

On top of dealing with high interest rates, car title loans also commonly have several fees that can easily add up to a substantial amount. This includes such fees as late fees, document fees, lien fees and origination fees. Additionally, there are also roadside assistance programs that are sometimes offered to borrowers for another fee. In fact, some lenders require that the borrower purchase roadside assistance. These fees usually add up to between $80 and $115, even for a car title loan as small as $500.

Illegal Fees

All of the fees above are completely legal to charge, however if a car title lender attempts to charge you a repossession fee this is illegal. Car title lenders cannot charge you a fee in order to repossess your car. However, that doesn't mean that some shady lenders will attempt to do so. It is crucial that you are fully aware of what lenders can and cannot do, as there are lenders who are more than willing to bend the law in their favor.

Interest-Only Payments

If fees and high-interest rates weren't enough, car title lenders also often give loan borrowers the opportunity to obtain interest-only payments for a certain amount of time. If this is done then loans are set up for an extended time period compared to the typical thirty-day car title loan. The borrower then only has to pay interest on the loan and not for the loan itself. These types of loans are often referred to as balloon payments, as the loan borrowers pays down the interest of the car loan every month and then at the end of the loan term they will have to pay the full amount of their car title loan. This type of payment is typically an extremely bad idea, as you will often end up paying a significantly higher amount in interest than you would otherwise.

Repossession

One of the more obvious risks of car title loans is that you may lose your vehicle if you are unable to repay your loan on time. Many people rely on their car in order to live their daily lives and get to work. Because of this, repossession of a car can be a major issue. Additionally, owning a vehicle is often people's largest financial asset and so if the vehicle is taken, so too does the money that it was worth.