Car Loan Alternatives to High-Interest Auto Title Loans
Richard BarringtonLoanBiz Columnist
While these are
trying times for people with bad credit, a car loan using the title to an
existing vehicle as collateral may only make things worse. Known as auto title
loans, these loans are marketed especially to people with bad credit. Car loans
are normally a sound and mainstream financial strategy of course, but these
auto title loans have some key disadvantages compared to ordinary car loans.
Car Loan Equivalent
of Second Mortgages
Most people obtain a car loan to purchase a vehicle. Whether that vehicle is new or used, the loan is a way of spreading the cost over a period of time, typically two-to-five years. This makes sense, because the average car buyer expects to own the vehicle for at least that long.
Auto title loans, however, are not used to obtain a vehicle. Rather, they are used to obtain cash for other purposes, using an already-owned vehicle as collateral. Thus, if the borrower defaults on the loan, the lender gets title to the car.
In some ways, an auto title loan can be thought of as the car loan equivalent of a second mortgage, but there are some distinct differences between a second mortgage and an auto title loan.
Weighing the
Alternatives
Here are some things a borrower should consider when weighing an auto title loan against the alternatives:
- Interest rates can be prohibitively high. Sixteen states allow high-interest car loans, and one, Illinois, has no limit on the interest rates for these loans. No matter how pressing the need for cash, no one should ever borrow with out a plan for paying off the loan. A car payment calculator can quickly and easily tell a borrower whether the loan payments will fit into the monthly budget.
- It may be cheaper to obtain a different vehicle. Rather than borrowing against a car, it may be cheaper to sell that vehicle, and make use of the cash while getting a conventional car loan on a new or used vehicle. A car payment calculator can help with this comparison--because of the difference between conventional car loan interest rates and high auto-title interest rates, it may actually be cheaper to upgrade the vehicle rather than borrow against it.
- Cars are not houses. Houses are often owned for decades and generally appreciate in value over the long run. An existing vehicle may not have that many years left in it, and almost all cars depreciate over time. All of this makes borrowing against an existing vehicle more risky than a second mortgage--it increases the chance that the balance on the car loan will exceed the value of the vehicle.
Source:
About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.
