Auto title loans and the law, know your rights

Auto title loans and the law, know your rights.

Since the beginning of time, or at least man, loans have existed. Pawn shops came shortly after. Then came auto title loans. A relatively recent addition, auto title loans have spread like a well adapted disease. Is this disease benign or deadly. The answer to this question is more complicated than the simplistic question might suggest, but a negative connotation cannot be avoided when referring to loans that reach 300 % annual interest rates.

This article will analyze the structure and nature of these loans and offer basic suggestions for customers who are planning to invest in this finance product.

What are auto title loans anyway?

In this case the name is rather descriptive. Just as you might take a valuable possession to a pawn shop, say a gold watch, get a small percentage of its value as cash and then pay back  the capital and a hefty interest.

In the case of auto title loans the collateral for the loan is your car. When you sign the auto title loan contract you actually pass on ownership of your car the the lending company until you pay for the full amount of the capital and interest. Theoretically these loans are meant to be short term, generally around 31 days. The interest rates are extremely high. It is not strange to see 250 % and 300 % annual interest rates. It is often the case that borrowers cannot pay for the loan after the initial 31 days and have to re-negotiate the loan, which is called rolling over the loan. Rolling over the loan causes the borrower to incur further fees and penalties causing the borrower to fall in a spiral of debt that often leads to the loss of the car. This is especially problematic when one understands how vital cars are in most western countries (which are those that offer this loan). Without a car families have often no way to take their children to school, go shopping or transport to work.

After painting auto title loans in such a bad light why would someone ever choose to buy one. These loans are aimed at borrowers with bad credit who cannot get a general bank loan or use a credit card. In fact providers of auto title loan will justify the usury level interest rates by saying that they are supplying this service to a group of people that would not generally be able to access finance and that the high interest rates are necessary to cover the high risk of the borrowers. Although there might be some truth in the risk of the average borrowers of auto title loans this statement works on the assumption that bad credit borrowers do not have other options. This is rarely the case. Borrowers generally have other options that do not have these incredible interest rates.

If you have already contracted an auto title loan it is important that you understand your rights. It is impossible to detail the law on this subject of every country and state, but in many areas these loans are considered illegal or some of their features are. For example in some states charging over a certain level of interest is illegal while in other countries the lender is not allowed to hold the keys for the “pawned” vehicle.