The Dangers of Auto-Title Loans

Looking for a little money to get you through the month? You're not alone. With gas prices skyrocketing right along with food and other energy costs, it's no wonder that more and more people are looking for ways to get some fast cash. But while it may be tempting to take out short-term loans such as the auto-title loan, it is strongly discouraged, because the risks involved can far outweigh the benefits.

What is an Auto-title loan?

An auto-title loan is a short-term loan similar to a payday loan that distributes instant cash in exchange for collateral. In this case, however, instead of offering a post-dated check, you turn over the title to your car. Since you're only turning over the title and not the keys to your car, it doesn't seem that you're giving up much. But rest assured (or rest in fear) that if you don't pay the total balance of your loan - including the interest incurred - the auto loan company will own your car.

Imagine, you needed $600 to get you to next month, and you hand over the title to your $5,000 vehicle - it's almost as if you're signing your soul over to the devil. The risk you're taking in losing your transportation is definitely a good reason to avoid taking out one of these loans, but if you need more reasons, let's look more closely at the terms of these loans.

The Terms of an Auto-title loan

If you're ever taken out a payday loan then you will probably be familiar with the terms of an auto-title loan. To be eligible for the loan, you must bring in your collateral, in this case your car title. Once they determine your eligibility, they will ask you the amount of the loan you want to take out (which is usually between $600 and $2,500, but no more than the Kelly Bluebook market value of your vehicle), have you sign a few papers saying that you agree to pay the loan back in full - interest included - within the timeframe they designate, take a picture of your car, hand over the amount to you then let you drive away in your car title-less.

From the day you've taken out the loan, you usually have 30 days to pay off the balance. However, if you don't pay the balance in full within the 30 days, they usually won't take your car immediately. Instead, you'll get some additional time to come up with at least some of the money. But usually after about six rollover periods, they will come take your car because it is now legally theirs.

This all may not sound too bad (especially having six rollover periods to work with) but with each rollover period comes major interest that can add up very quickly. For example, if you take out a loan for $1,000 and you have a 300-percent annual percentage rate, this means each month that you rollover the balance, they will add 25 percent in interest to your total balance due. So if you miss payment for the first month and pay the next, you'll owe $1,500, which is $1,000 owed plus interest for two months. At this rate, if you fall behind, you'll spend your time paying interest and never paying down the actual balance - just what they hoped you would do. The good news though is that if you change your mind about the loan after taking it out, as long as you cancel the agreement within one business day and pay back what was given to you, you'll owe no interest and get the title to your car back.

The major benefit to taking out an auto-title loan is the instant cash you can receive. But before you driving your title to one of these places, ask yourself, is this your only option after all others have been explored? Because if some other emergency occurs that affects your ability to pay back the loan, you will have lost your money and your only means of transportation.