Risks Of Auto Pawn Rollovers

An auto pawn loan can be a quick way to get cash using the title of your vehicle. In this kind of loan scenario, a driver essentially "pawns" a vehicle that they own, giving the title to the lender until the loan is paid off. Financial experts are criticizing this kind of loan as exploitative, citing the emergence of auto pawn loan services around military bases and in low-income communities. Because an auto pawn loan is a little different than going to a pawn shop, it's easy for a borrower to forget that they have specific long-term financial responsibilities that can easily get them in trouble, and that in a case of nonpayment, they could lose their car to repossession and still be liable to pay a spiraling debt.

The risky part of an auto pawn loan occurs in what is called rollovers. The initial term of an auto pawn loan is generally short, for example, two weeks to one month. That's how long the borrower has to pay the debt back. But, if the debt is not paid back at the end of that period, the lender can "roll over" the remaining debt into another loan, this one with higher interest rates. As interest compounds, and interest rates grow, borrowers can easily find themselves trapped in a never ending loan cycle, with a debt that they can never afford to pay off.

The APR or annual percentage rate refers to the interest accrued during a one-year period. Some auto pawn loans carrying APR, others have interest rates that reset according to the term of the loan which may be much shorter than one year. When auto pawn loan rollovers occur, it's not uncommon to see an APR in the triple digits. With an APR like 625%, for example, an unpaid debt can increase rapidly in a matter of weeks. This upward direction leaves the borrower hopelessly trapped.

The way to avoid this kind of scenario is twofold. First, be sure to choose loans that you can afford to pay off within the original term. Second, take a good hard look at how interest rates would rise in a rollover situation. Calculate the interest you would be paying to have a clearer understanding of what kinds of situations will swamp you in debt.

Some states have recently begun to regulate how many rollovers in an auto pawn loan can have. Previously, there was no regulation, but now some state governments are realizing that consumers need a little help with keeping the quick cash/debt spiral from some auto pawn loan situations under control.

An auto pawn loan has it pros and cons, but it's important to do the research before securing one with your vehicle title. At the very least you'll be one step ahead of the game.