Pay day and title loan interest rates pose dangers

Investigations

KNOXVILLE, Tenn. (WATE) – At this time of the year, if money is short, some people turn to pay day or title loan companies for quick cash.

While these businesses serve a purpose, they come with consequences if you don’t pay your loan back within a month, and the interest rates are extremely high if you roll over your loan.

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The annual percentage is close to 300%.

Car title loans offer you quick cash in exchange for your vehicle’s title as collateral. Generally, car title lenders have few requirements for potential borrowers.

You can often walk away with the money in less than an hour, but these loans are expensive, if you don’t pay it back within one month.

So – you need to understand the terms of the agreement.

A woman’s title loan problems

One woman shares her story in which she entered the car title loan game – and is having a hard time winning.

Geraldine Kline had been pleased with her six-year-old car, which she paid off in January 2018.

Four months ago, however, Kline was short of cash. Using her car as collateral, she took out a title loan on the July 8.

“I wanted to borrow exactly the $2,500. But from my understanding, it will be a long time to pay it back,” she said. “I asked her how long and she said maybe about a year. I said that’s not too bad.”

The term of the title loan was for 30 days, according to the contract.

Kline said she was told at the loan company that she could rollover the advance. However, Kline says she was not aware that 267% — is the annual interest rate.

“When I asked how long it would take to pay it, she said about a year unless you want to pay it all at one time,” Kline said. “She said you can do that next month if you have the money.”

So far, Kline has made four payments on the $2,500 loan.

“I’ve paid a little over 2,100 to 2,200 dollars already in four months. It’s the payments going up and up that is the problem,” she said. “When you live on a fixed income, you can’t go in there and pay 550 in one month.”

By state and federal law, title loan companies are upfront with their agreement terms and they are strictly regulated. In the contract, The Truth in Lending disclosure shows that the annual percentage rate is 267%.

“I should have read that. That is my fault for not paying attention to detail,” Kline said.

Financial expert weighs in on title loans

John Fawaz, a financial planner at UT Federal Credit Union, says once a borrower gets behind on a title loan, the interest rate piles up.

“When you are borrowing $2,500, a lot of time very few people can pay it off in just a month,” Fawaz said. “Even though you think I can do it, it is really tough. Well some people say, ‘I’ll pay it off in a year,’ well in a year you pay 2,000 extra in interest. You keep it three years, well now you are paying eight- thousand in interest. Then the problem gets worse.”

Fawaz adding that rolling the title loan over is the problem.

Title loans are potentially risky because if you default you can lose your car.

In fact, 20% of those who take out a short-term, single-payment car title loan will have their cars repossessed, according to the Consumer Finance Protection Bureau.

Records also show that only 12% of single-payment borrowers repay within 30 days.

Kline says she’ll continue to make her loan payments and hopes soon to get out from under the debt – she estimates it’ll be paid off by February 2020.

Some tips for title loans – be aware

Paying off a title loan is the most straightforward approach to avoiding the high interest rates.

One option to replace the title loan with cash is to take out a different loan – a fixed rate loan from a bank or credit union is often less expensive than rolling your title over month after month,.

If all else fails, somebody close to you might be willing to co-sign and help you get approved for a loan.

The last thing you want to do is default on a title loan – you not only lose your car, but it also ruins your credit.

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