Auto title loans can lead to financial disaster

February 21, 2014 (Press-News.org) Auto title loans can lead to financial disaster

Article provided by The Rollins Law Firm
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When people are in tough financial situations, it can be tempting for them to look to any outlet for relief -- particularly when they lack access to traditional forms of credit. One source of credit that some consider is an auto title loan, where they secure loans with their vehicles. However, taking out such a loan can make a person's bad financial situation even worse by trapping them in a cycle of debt they cannot repay.

Borrowing against a vehicle's worth

The auto title loan industry is thriving in the U.S., even though it is harmful for consumers. The Center for Responsible lending reports that approximately 7,730 auto title lenders operate in 21 states across the U.S., including Mississippi, generating about $5.2 billion in revenue annually. About $1.6 billion is from the actual loans and $3.6 billion is interest on the loans.

Applying for an auto title loan is relatively simple. In many cases, all a person needs is a photo ID and proof of ownership of a vehicle. Most states not require auto lenders to conduct credit checks on applicants to determine whether the applicants can repay the loan. A person usually borrows about 30 to 50 percent of a vehicle's worth, and the lender puts a lien on the vehicle until the borrower repays the loan.

Trapped in a cycle of debt

Those who take out auto title loans are generally facing an immediate financial need, such as a utility bill or credit card payment, and lack the funds to make payment. While the auto title loan satisfies the immediate need, the borrower now has to repay the auto title loan -- along with interest. Auto title loans generally carry exorbitant interest rates. The average consumer who borrows $1,000 on an auto title loan ends up paying about $3,000 to $4,000 after interest, according to the Virginia Poverty Law Center.

Auto title loans usually have very short repayment periods, often as short as one month. In many cases, those who cannot repay their loans roll those loans over into new auto title loans in an effort to buy time to repay. They end up getting stuck in a revolving door of high-interest borrowing.

Those who do not take out new loans but cannot repay end up losing their vehicles to repossession. Without their cars, many cannot get to work, furthering their financial difficulties.

Speak with an attorney

Those considering auto title loans because of financial difficulties may want to consider alternative forms of debt relief such as bankruptcy. Bankruptcy can help people discharge unsecured debts and regain control of their finances without the weight of unpaid debts hanging over them to hinder the process. If you have questions about how bankruptcy can help you, speak with a skilled Tennessee bankruptcy attorney.