Be Aware of a Cash Loan for Your Car Title: 5 Facts for Avoiding a Bad Loan

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January 27, 2012

When you’re trying to get financing agreements for your next vehicle purchase, one option is a cash loan for car title agreement, also called an auto pawn loan or a cash title loan. This kind of loan is easy to take out, but many of these loans have some less than desirable terms for the borrower. Here are some of the facts that you should know before taking out a cash loan for your car title.

  1. Your Own Car is Collateral – The basic way that cash title loans work is that the loan company holds the title of a vehicle that you already own as collateral. This allows you to “secure” a loan while continuing to use your car. You don’t give up the car, you just give up the title. However, this means that if you fall behind on payments, the loan company can take your car, the car that you already own. The vulnerability of “seizure of assets” is one of the items that you want to think about carefully before getting involved in a fast car loan like an auto title loan.
  2. Most Borrowers Don’t Get Full Value – The up front promises on a cash title loan may deceive you into thinking you will get a loan for the full value of the car that you produce as collateral. This is usually not the case: lenders assess your vehicle and give you a portion, maybe 40-60% of that value, so that you may have to look elsewhere for additional financing money.
  3. Most Cash Title Loans Have Short Repayment Periods – The initial term of a cash title or auto  pawn loan can be really short, as little as one or two months. This is not a lot of time to come up with a large sum of money. What really affects a lot of borrowers is what happens if they don’t make payments on the initial loan.
  4. Cash Title Loans Have Costly Rollovers – After a loan period has passed, if the borrower still owes money, the loan company can usually put that amount into a second loan with a much higher interest rate. Interest rates for these loans can reach 100%, 200%, 400% or more, making it almost impossible to pay off the entire loan, even over a long period of time.
  5. Government and Watchdog Groups are Seeking to Limit Cash Title Loans – Federal and state governments are looking at the negative consequences of allowing borrowers to take out loans with exceedingly high interest rates. Recent federal efforts at consumer protection include limiting this kind of predatory lending, as well as payday loans that also have high interest rates.

Think about all of the above before you get into a short-term auto collateral loan agreement. Alternatives to these potentially costly loans can help you get better terms for financing your next vehicle.

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