Why Payday Loans are Better than Car Title Loans
Recently, you might have seen ads for something called a car title loan.
"Your car can be a source of cash," the lender contends.
It sounds simple - you need a loan and you use your vehicle as collateral for the loan. What is the harm in that?
The truth is there is a lot of risk associated with car title loans - risk that could leave you stranded - literally - on a road to even greater financial hardship.
How Car Title Loans Work
When acquiring a car title loan, borrowers sign over the title of their paid-for vehicles to the lender in order to secure the loan. Generally, car title loan lenders do not conduct a credit check and there is minimal verification of the borrower's income. In most cases, the loan then must be repaid in full within 30 days.
One of the drawbacks of a car title loan in comparison to other types of loans is the amount of fees that typically come with a title loan. Like most loans, a borrower must pay a certain amount of interest on a car title loan, but the fees do not stop there.
Many car title loan companies also charge processing fees, document fees, origination fees and lien fees on top the interest they are charging already. In addition, these lenders often offer a so-called roadside assistance program for a fee - some lenders actually require this fee.
Furthermore, some dishonest car title lenders will try to charge something called a repossession fee, which is illegal. The lender will actually charge the borrower a fee in order to repossess the borrower's vehicle.
This fee leads to the next drawback - and potentially the worst of all - repossession of your vehicle.
By signing over the title of your car or truck, you are in effect giving the lender the right to repossess your vehicle if you are unable to repay the loan in a certain amount of time. And car title lenders are serious about collections.
A 2004 study conducted by the Consumer Federation of America showed that 75 percent of car title loan borrowers had to provide a copy of their car keys to the title loan lender. In addition, many of these companies even started the vehicle to see if it worked and took photographs of the vehicle, all before the customer filled out the loan application.
There has even been a case in which a car title loan company installed a GPS system in its customers' cars in order to track the location of the vehicles and remotely shut them off if the borrowers did not repay their loans on time.
To make matters worse, you could lose your vehicle for a loan that is less than half of the value of your car. Most car title lenders will loan only 25 percent to 50 percent of the value of a vehicle. However, if the vehicle is repossessed, the lender can turn around and sell it for 100 percent of the value and keep the rest as profit.
The Benefits of Payday Loans
So, why are payday loans better than car title loans?
For one, you do not need to sign over the title of your vehicle. Payday loans are unsecured loans, meaning that you do not need to provide collateral in order to secure the loan. You are not at risk of losing what might be your only method to get to work or to take the kids to school.
It is important to note that payday loans are not completely risk-free. If you are not careful, you can rack up quick a bit of interest if you do not repay the loan by its original due date.
