Hardly a day goes by that someone doesn’t voice his opinion about payday loans, cash advances or car title loans. As if a struggling consumer needed still another reminder about the potential dangers of, car title loans, but things might change.
Car title loans — or auto ttitle loans — first appeared in the early 1990s and opened up new financial channels to individuals with poor or no credit. A cousin of unsecured loans, such as payday loans, borrowers use their car titles to secure the loan. Borrowers who make use of title loans must allow the lender to place a lien on their car title and temporarily surrender the hard copy of their car’s title. When the load is repaid, the lien is removed and the car title is returned to its owner. If the borrower doesn’t make good on the loan, then the lender is able to repossess the vehicle and sell it to repay the oustanding debt.
Typically short-term with higher than normal interest rates, lenders usually don’t check the credit history of borrowers, only considering the value and condition of the vehicle being used to secure the loan. Despite the secured nature of the loan, lenders argue that the high rates of interest are necessary. To prove this, they piont to the increased risk of default on a type of loan that is use by borrowers who tend to already be experiencing financial troubles.
Most title loans can be acquired in 15 minutes or less and be in amounts as small as $100. Most banks and other lending institutions won’t loan under $1000 to someone without any credit. In addition to verifying the borrower’s collateral, many lenders require that the borrower is employed or has some source of regular income.
The amount which can be loaned is completely dependent on the value of the vehicle supporting the loan. A lender will typically look up the auction value of the car and offer a loan that’s between 30% and 50% of the vehicles value thus leaving a cushion for profit if they ever need to reposses and sell the car to recoup the money lent.
Despite the risks, sometimes a car title loan is just the thing needed to stay on top of financial problems when there is no other way out. For a short-term bailout from financial distress, car title loans have become the “new normal” for finding the credit you need when you need it the most.
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