Auto Title Loans Riskier Than Payday Loans, New Report Says
When you’re desperate for cash and have run out of options, you might be willing to risk your car to buy yourself some time.
Auto title loans are currently legal in 25 states
That’s what happens with an auto title loan. You keep your car, but sign over the title to the lender who uses the vehicle as collateral. If you don’t pay on time, the lender can repossess your wheels.
But the auto title loan market is “plagued by problems,” including unaffordable payments and excessive prices, according to a new report from the Pew Charitable Trusts.
“We found that auto title loans share the same harmful characteristics as payday loans,” said Nick Bourke, director of Pew’s small-dollar loans project. “They require balloon payments that borrowers can’t afford and most customers end up having to re-borrow the loans repeatedly.”
Fewer people use title loans than take out payday loans, but they are usually for larger amounts. And they typically carry higher costs than payday loans, the Pew study found. Plus, there’s the additional risk of losing a major asset – your car – if the debt cannot be repaid.
One of the most significant findings in this report: The average customer pays more in fees than the amount borrowed.
The average auto title loan is for $1,000 and the monthly fee is $250 (equivalent to a 300 percent APR). That $1,250 payment is typically due in 30 days and is more than most borrowers can handle. Pew estimates that it’s about 50 percent of most borrowers’ monthly income, so they renew the loan – again and again. Add up all those fees and the average customer pays $1,200 to borrow a thousand dollars.
Auto title loans are advertised as a way to handle a temporary cash-flow problem or an emergency, but few people use them that way. Continue lendo “Auto Title Loans Riskier Than Payday Loans, New Report Says”