Title Loans

What is a title loan?  A title loan is a loan very similar to a payday loan except that one uses their automobile as collateral, hence the name "title" loan.  If the borrower defaults on the loan, the lender can seize the borrower's vehicle to satisfy the delinquent payment.  Since the title loan company needs to have a clear, unencumbered title in order to seize the car for nonpayment, borrowers who have not paid off their car and do not have a clean title to it do not qualify for a title loan.  

Generally, title loans are looked upon negatively by just about everyone.  The fact that one needs to take out a title loan in the first place is an indication that they are not financially sound and are at high risk of bankruptcy, default and getting in to all sorts of financial trouble.

In fact, so many people, including members of the armed forces, have gotten in to trouble with title loans that many states have started to ban them or highly regulate them.  

One of the most egregious elements of a title loan is the outrageous interest rates associated with them, often exceeding 500 percent.  The interest on title loans is so high that people often get trapped in them because they can never afford to pay them off.  In order to keep their customers trapped, title loan companies refuse to accept partial payments.  Therefore, customers have no choice but to "renew" the title loan, meaning that they pay a fee to float the title loan until next month.  If they can't pay next month, they pay an additional fee, and on and on it goes.

Before you take out a title loan you should know that one study found that about thirty percent of title loans were renewed at least three times before they were paid off.  This was because the borrower couldn't pay the loan as agreed, therefore, he or she had to pay a fee to keep the loan current.  The title loan company wants customers to do this so that they can keep accumulating an enormous amount of profit in interest charges and ridiculous fees.  Many people get trapped in a nightmare scenario of never being able to pay off the title loan, much in the same way that payday loans work.

How Do I Qualify for a Title Loan?

If all of the above hasn't scared you away from taking out a title loan, and you are still interested in getting one, make sure you qualify before you contact a title loan company.  In order to qualify, you must (1) own your car outright and have no liens on it; (2) turn over the car title to the title loan company; and (3) turn over a spare car key to the title company.  Some title loan companies put a tracking device on the car so they can locate it if they need to repossess it later.

Do you have to surrender your car?  No, they let you keep the car, but they will repossess it if you don't pay the loan as agreed.  As long as you pay the loan as agreed, you can keep driving your car.

Do Title Loan Companies Want Borrowers to Default?

No one has come right out and accused title loan companies of encouraging their customers to default, but think about it, if a customer borrows $500 against a car worth about $5000 and defaults, the title loan company gets a $5000 car.  It seems like a very good deal for the title company for borrowers to default.

Legislation Might Outlaw Title Loans in the Future

As stated above, some state legislatures have banned title loans outright; while others regulate them.  The AARP and other consumer organizations are lobbying states that allow title loans to, at least, cap the interest that they charge so that fewer people lose their vehicles. The title loan companies lobby state legislatures to reduce regulation and some win exceptions to state laws. 

Title loans and payday loans are considered to be predatory lending because they prey on people who are in financial trouble or low income and you are strongly urged to avoid them if you can.

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