How to Get the Best Auto Pawn Loan Rates

When it's time to pony up for a new or used car or vehicle, and the car shopper comes up short on cash, he or she looks for the best possible solutions for getting financing or loan options to drive away in that great new ride—an auto pawn loan or auto title loan is one way to get the money needed to purchase a car or truck - and getting the best auto pawn loan rates is an essential part of the process.

What Is an Auto Pawn Loan?

An auto pawn loan or auto title loan is a type of “secured” auto loan, in other words, one that is backed by collateral. It works like this: the potential car buyer shows a lender that title of a vehicle that he or she owns. That title, and the vehicle attached to it, is the collateral for the existing car financing or loan agreement.

Auto Pawn Loan Rates: Rollovers

If you're getting an auto pawn loan, you are already taking advantage of the lower interest rates that come from having collateral to back up the loan. The main thing to protect yourself against is the auto pawn loan “rollover.” The rollover is what happens at the end of an auto pawn loan term if the loan is not paid off in full. Since auto pawn loans generally lend money for shorter terms than conventional car loans, this can be a tricky process.

For example, if the original auto pawn loan is lent at 6% for 2 months, the interest does not really build up much. But, if the borrower chooses to let that loan “roll over,” it gets a new interest rate. Lenders set the interest rates for the rollovers. Say the original 6% loan rolls over with a 12% rate for 2 more months, and the borrower pays off half of the amount during that time. The remaining amount can then rollover with a much higher interest rate, say, 24%. Clearly, multiple rollovers have the ability to create a “debt spiral” where it becomes nearly impossible to pay off the entire loan.

That's why it's important to pay off auto pawn loans during their original period of time, even if it is only a few weeks. Some states with stricter consumer protections have made laws to limit auto pawn loan rollovers, seeing how some companies use them to trap households in “snowballing” debt situations.

Other Factors in Auto Pawn Loan Interest Rates

There are a few other tricks for getting good interest rates on an auto pawn loan. One is to put down a larger down payment. This not only decreases the amount of money that will be financed, but it presents a lower credit risk and shows that the borrower is serious about their investment. Another is to be knowledgeable about your credit score and how it affects any loan applications that you fill out. A savvy consumer builds good credit over time, and uses this as their best defense in any financing or loan situation.

Take advantage of the above knowledge to get a good deal on an auto upon loan and avoid excessive interest in situations where late payment leads to multiple rollovers. With the right care and attention, and auto pawn loan can be the right tool for buying an additional vehicle.