Car Title Loan

What it is:

A car title loan is a short-term loan where a borrower uses the title of his or her car as collateral for the loan.

How it works/Example:

Loans for car title loans are usually for less than 30 days and change a high rate of interest. Borrowers offer the title of their car as collateral for the short-term loan. If the borrower is unable to pay off the loan, then the lender will take possession of the car and sell it in order to gain back the loan amount. 

Car title loans are generally used by people with low income or poor credit scores who need cash for temporary crises. Car title loans are regulated so that they have a $4,000 limit. 

Why it Matters:

Lenders who offer car title loans are often referred to as predatory lenders because they prey on people who do not qualify for credit card accounts or bank loans. Since the loans on a short-term basis, the interest rates on the loan are normally stated as the monthly rate instead of the annual rate. In reality, the annual effective interest rates for car title loans are 12 times higher than the stated monthly rate.

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