by Adam Mack
Title loans! They are a terrible thing. The only thing comparably worse is its ugly twin, the payday loan. So, lets start off with the basics: What is a title loan? And why are they bad?
WHAT IS A TITLE LOAN:
A title loan is sometimes referred to as a title pawn other states. A title loan offers quick cash to people who have equity in their vehicle. The title (your ownership) of your vehicle becomes collateral for the loan. Sounds great, right? Keep reading.
WHY IS IT BAD:
As the saying goes, the devil is in the details. And this is especially true when dealing with title loans. In Kansas, it is not uncommon to see 00% interest rates! Here is the fine print from an actual title loan agreement: Daily Periodic Rates: “Corresponding ANNUAL PERCENTAGE RATES. Your Daily Periodic Rate is 0.805479% and your corresponding ANNUAL PERCENTAGE RATE (“APR”) is 294%.” The agreement further explains that the balance (principal + accrued interest) compounds on a daily basis! So, lets break down what that means in a real life situation. John Doe is late on his mortgage. Driving home from work he sees a bright yellow sign promising him easy cash if he will just come inside and fill out an application.
He pulls his newly paid off 2010 Ford Taurus into the lender’s parking lot and enters the building. The unnamed business quickly agrees to generously lend him $2,000.00 by way of a title loan. Mr. Doe brings his mortgage current and thereby proverbially jumps from the foreclosure pot to the title loan fire. Mr. Doe now must pay 294% interest on that loan. For that $2,000.00 loan, he will have to pay $490 per month just to keep that $2,000 from growing out of control. If Mr. Doe can only make interest payments, that means in 12 months he will have paid $5,880.00, and he will still owe the full $2,000!! Now, lets say that Mr. Doe’s financial problems which lead to him being late on his mortgage are still present. Mr. Doe finds himself trying to make it month to month on a tight budget. He just can’t make ends meet. He does not want to get behind on his mortgage again, and he has to feed his kids. Sadly, Mr. Doe is unable to make payments for approximately six months, keeping in mind that the balance due is compounding daily! So, on day one of the life of the title loan, Mr. Doe owes $2,000.00 principal. But due to the interest rate, by the end of the day Mr. Doe will owe an additional $16.11 as interest. Meaning on day two of the title loan, he does not owe $2,000.00, but he now owes $2,016.11. But, by the end of day two, he does not owe $2,016.11, but instead owes an additional $16.24. Fast forward 182 days (approximately 6 months) of missed payments. Mr. Doe’s title loan principle has compounded to a whopping $8,543.95! Now the title loan company wants to take Mr. Doe’s vehicle, Mr. Doe cannot keep his job and support his family if he cannot drive to work.
It is plainly and painfully obvious why title loans are bad news. They spiral out of control so easily. And there is almost always a better solution than a title loan. The interest rates are so high that it is designed to make the borrower fail. Just look at the numbers. Title loan companies do not make much money if they are paid off immediately, but their financial reward is achieved by getting you, the borrower, onto a financial treadmill you cannot get off of. Title loans are designed to take advantage of people in desperate financial circumstances. If you have found yourself in the title loan or payday loan trap, there are many Topeka bankruptcy attorneys who are willing to give you guidance on how best to release yourself from the snares of the title loan interest rates. Talk to a bankruptcy lawyer at our office today to learn more! (785) 274-9040.