NDSU Extension Service - Ramsey County

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New Spin on an Old Loan

New Spin on an Old Loan

 

Short on cash?  Have a working vehicle?  You may be a target for a new spin on a long existing type of loan that is making the rounds - “car-title loans”.

What are "car-title loans"? Car-title loans are small loans "secured" by the consumer's car or truck, usually for $200 to $400 or so. The vehicle is "collateral" - and it can be "repossessed" by the lender if the borrower defaults on the loan (fails to make payments.) The lender actually keeps an extra set of keys to the vehicle, and may start repossessing a vehicle if the borrower is late in making even one payment.

For car-loans, borrowers often pay astronomical interest rates:  The Attorney General of one Midwest state recorded reports of interest rates up to 360% for car-title loans.  Car-loans are also unusual in that the high interest payments are due repeatedly.  For example, if a person borrows $300 at 360% interest he/she will have to pay $44.55 of interest in just fifteen days - and have to pay interest again and again each fifteen days, until the $300 loan is paid. Many consumers can't pay back the loan right away, and they just pile up repeated interest costs, or take out still more loans.  In other words, their financial situation only gets worse and worse.

With the first payment due so quickly and then repeated payments quickly following, it is easy to miss a payment.  But if even one payment is late, the lender may start action to repossess, which could occur as quickly as 30 days.

The best bet for consumers is to avoid car-title loans. Instead, try to get ahead by saving small amounts each week or month, or go to banks or credit unions that offer loans at far better rates. Stay off the "debt tread-mill" and don't risk losing your vehicle.

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