Car title loans or auto title loans are a type of secured bad credit loans and are much sought after nowadays. They provide the flexibility of letting you drive your car during the loan period and not having to pawn it.
However, auto title loans are relatively riskier in comparison to various other loan options. High Annual Percentage Rates (APR) and short repayment periods are just the tip of the ‘risk iceberg’. Here is a list of the potential risks associated with these loans.
This is one of the most obvious risks, which is attributed to all kinds of secured loans, including car title loan. Your car is at the risk of repossession if you fail to pay the loan amount. Secured loans are a way of reducing ‘lender risk’ by acquiring title on the property used as caveat in the event of your inability to repay the loan amount.
Secured loans are an inherently risky option. However, only to the people who make it that way by not planning ahead. For instance, you are always at a risk of being evicted from your apartment if you fail to pay rent. It is the same scenario with mortgages and other similar loans.
The only way to avoid this risk is by repaying the loan amount on time. Car repossession means that you lose your personal transport, and this makes it difficult to get to work.
On top of that, many lenders require the installation of starter interrupt device or Global Positioning System (GPS) for repossession purposes which creates an added financial burden.
Repossession also means that you lose the difference between loan amount and car sale value. There are only a few states that force lenders to pay back this difference. A majority of states allow the lenders to keep the full sale amount to recover the loan amount as well as damages.
2. Interest Rate Balloon
Interest rate balloons are described as situations where the interest rate in effect exceeds the principal loan amount. You will not be able to get out of your loan in this situation without paying the interest rate value as well as the principal amount.
The loan amount is spread across a number of months in the case of installment car title loans as compared with single payment car title loans. The monthly payments are comprised of two parts – fraction of the loan amount dividend and the interest rate of the corresponding loan value.
If you miss out on a single repayment then the interest amount will roll over to the next month. This causes a pile on effect which can be compared to credit card defaults.
The interest, penalties, and late fee charges driveup the repayment amount of succeeding months to such a limit that the total interest value can surpass the principal amount if you fail to meet consecutive monthly repayments.
3. Secondary Loans
As per a study conducted by the Center for Responsible Lending in 2007, 20% of car title loan borrowers have to take up a secondary loan to repay the first one. A secondary loan might seem like the only option when you do not have any other means of paying the loan.
Defaulting on a monthly payment gives the lender access to your vehicle and the right to repossess. A secondary loan adds pressure on your financial situation. Penalties, late payment fees, and unnecessary interest amounts carve out a major chunk of the principal amount. Not to mention the fact that you are stuck with another loan that needs to be paid off.
4. Roll-over effect
There are many lenders who offer the roll-over feature. This refers to placing your existing loan into a new package when you are unable to make the repayment terms.
This is usually done in the case of single payment car title loans as the repayment period is typically 30 days. The lender might offer you a roll-over if you are unable to repay your loan within this period.
The roll-over feature might seem like a great option on face value. However, it adds on to the repayment burden because of the extra fee, interest and penalties that are added to the amount.
The roll-over effect is dangerous to anyone’s financial situation as late fee and penalties alone can surpass the initial principal amount in a matter of few months.
5. Selling Valuables
You might not get an option to take up secondary loans or roll-overs. This will compel you to sell your existing valuables such as jewelry and gadgets to cover the monthly payments lest you lose your car. You might require selling these assets to cover up additional costs of penalties and late fee as well.
Letting go of valuables to pay for ballooning interest can seriously contribute to your stress levels. In addition, many times the risk of repossession does not go away regardless of selling your valuables. Your car would still be taken away by the lender if you fail to meet monthly payments.
How to Lighten the Load
There are many alternatives to taking out an auto title loan. However, if this is your only option then you need to be careful to set up a payment cycle.
Most lenders send automatic alerts notifying you with the repayment date. If your lender does not have this feature, then it will be a salient idea to set up calendar reminders so that you do not incur heavy penalties.
You must also take stock of your financial situation and find ways to make extra money in order to cover the loan amount. You can evaluate your spending and curb expenditures wherever possible. For instance, you might consider giving up eating out for the whole month to save some extra dollars.
Prioritize over Risks and Rewards
Car title loans are a stellar way of acquiring quick cash when you have a poor credit score. Most risks offset the rewards that accrue with title loans at the end of the day. You need to be careful to make every payment on time. It is important that you consider loan terms carefully and calculate if the loan amount is worth the risk.