Avoid the Dangers of Car Title Loans

Although taking out a short-term car title loan may seem like a sensible option, in reality a consumer should avoid the dangers of car title loans by looking at other options. Car title loans are predatory loans and can put a borrower into an endless cycle of debt while taking a big risk that they will lose his or her car which is often the only means the borrower has to get to work. To understand how to avoid the dangers of car title loans a consumer must have some basic understanding of how such loans work and then take steps to protect themselves if such a loan is necessary or, even better, take steps to avoid such loans completely.

Two Important Points about Car Title Loans

The interest rates on car title loans, which can range from 30% to 300%, is what makes these loans dangerous for the borrower. These high interest rates can cause an endless cycle of debt for the borrower. The borrower is often fooled by the small initial fees charged by the car loan company, not understanding the true cost when the APR is added in. The rollover periods must also be considered because these can compound the interest to a point where any payments made by the borrower will only cover the interest and not reduce the principal. Making sure you can pay back the loan within a set period, usually 30 days, will help avoid the problem of compounding interest. Also, there is a time limit to how long a borrower can keep doing rollovers and after about six rollovers the borrower can not only lose their car but ends up deeper in the hole financially. Also, the borrower must be aware that the car loan company will give the loan will be less than the blue book value of the car with the idea of the car title loan company to selling the car at a profit if the borrower should default. These are two critical points about car title loans and should be considered before any borrower takes out a car title loan.

Other Ways to Avoid the Dangers of Car Title Loans

The first action anyone can take to avoid the dangers of car title loans is to save as much as possible for future trouble. Saving some cash will allow you to be more flexible in your options and avoid having to take out such predatory loans like car title loans. Being aware of the APR  is critical because you will have a better idea of the true cost of a car title loan and can make a better decision as to weather a car title loan is affordable or is the best option. Related to being aware of the APR, is the step of shopping around and looking at other options. The idea is to find a alternative that will not put the only item you may have to get back and forth to work, your car, at risk. Watch out for forced arbitration clauses in any car title loan contract so any disputes can be handled in a court of law.

In conclusion, taking proactive steps like saving some money for when times are bad can help you avoid having to take out predatory loans like a car title loan. However, being educated about some of the key points about how car title loans work can help the borrower avoid the dangers of such loans by being aware of the true costs and risks involved.