If you are strapped for cash and cannot get a loan from your bank or credit union, borrowing against your vehicle is an option. It is likely to be, however, considered a predatory loan — a loan the lender figures you might not be able to pay back on time or at all. Predatory lenders generally charge higher interest rates that could run in the triple digits and fees for processing, documentation and origination that could total around $100.
Car Title Loans
Car title loans are easy to get because your car secures the loan. Anyone who has a car title can get one, and no credit checks are needed. You typically get the cash you need in a day or two after applying. Only get a title loan if you can pay it back in a month or two at most to avoid paying the rollover interest rate. A rollover occurs when you can’t pay back the loan the first month. In that case, you pay only the interest. For example, if you borrowed $1,000 at 9 percent interest, instead of paying the $1,090 you owe, you would pay $90, the interest only. Next month, you would owe $1,090. At this rate, by year’s end, you would pay more in interest than what you borrowed.
How Much to Borrow
The lender lets you know how much you can borrow. The maximum is usually 50 or 60 percent of the worth of the car, but most lenders let you borrow only 25 to 50 percent of the car’s worth, according to Christopher Neiger of CNN Living. You do not need to borrow the maximum amount. It is better to borrow only what you need because the more you borrow, the more difficult it will be to pay back, especially when you account for the interest costs.
When you apply for a car title loan online, you are required to give your personal, vehicle and insurance information. The entire process can be completed online, or you might need to go down to a physical office to drop off an extra set of car keys and the title. You can receive your money in an hour with some online lenders.
Most people do not pay their car title loan back in 30 days; it typically takes eight months for the borrower to either pay the loan or have his car repossessed, according to Leslie Parrish of the Center for Responsible Lending in an Edmunds.com article. The longer it takes you to pay the loan back, the more interest you pay, making it increasingly difficult to pay the loan. For example, an interest rate of 9 percent per month becomes 108 percent annual interest. If you can’t pay the loan, you lose your car. Even worse, it the car sells for less than what you owe, you lose your car and still owe the difference between what the car sells for and what you owe.
Laura Agadoni has been writing professionally since 1983. Her feature stories on area businesses, human interest and health and fitness appear in her local newspaper. She has also written and edited for a grassroots outreach effort and has been published in "Clean Eating" magazine and in "Dimensions" magazine, a CUNA Mutual publication. Agadoni has a Bachelor of Arts in communications from California State University-Fullerton.