Why Auto Title Loans are Bad

When you take out a home mortgage loan your house becomes collateral for your loan. In the same way when you take out a car title loan your car becomes collateral for your loan. However these two products are totally different and you are not required to give a copy of your new front door key to your mortgage lender. The lender who advances your car title loan though may well expect a copy of your car key and attach a tracking device to your vehicle.

Just because you feel relative safety in putting up your home as collateral for a mortgage that is no reason why you should feel anything but alarm bells if expected to hand over your fully paid for vehicle as security for a loan. The fact that you are asked to sign over an asset which is free of debt should warn you that you may not be the one driving off in it in the near future.

Any kind of secured loan is a risk to the borrower as they stand to lose their collateral. Using ones home as collateral for a mortgage is the only way you can ever expect to receive the financing to purchase it though and it is such an accepted practice that everyone does it. However only the desperate are willing to sign over a fully paid for vehicle in order to obtain a loan worth less than their asset, without questioning how much of the value of that asset may ever be returned to them if the loan goes sour and the lender drives off in their vehicle. The fact is that in some states the lender is not obliged to return any portion of the profit he receives selling on the vehicle.

Originally conceived as short term loans, auto title loans were the collateral based equivalent of pay day loans. However the loans can now be granted for longer periods which place the borrower at even more risk of default. The interest rates charged on the loans are very high though usually hidden by the lender who chooses not to advertise them and is not forced through regulation to do so.

Secured loans are generally offered with lower interest rates as backed by an asset which should ring further alarm bells to the borrower. In addition to handing over the title lien to the car the borrower may have to make changes to their insurance policy to make the lender the policy payee.

Auto title loans are a very bad idea as the borrower is handing over a paid for asset which is generally needed, to cover the loan. The borrower will have bad credit if they are utilising this type of loan which means they are at higher risk of default. It would be much more prudent for the borrower if desperate to take a pay day loan without risking an asset, than an auto title loan. However the borrower may well have had that avenue of finance closed down to him as some states have banned pay day loans. Ironically the lenders have simply moved into the gap left by pay day loans to introduce auto title loans.