When 21-year-old Ryan learned a friend needed some cash to help his mother out, Ryan did what a good friend would do…he lent his friend the money. The problem arose when Ryan’s father, John, found out how his son had gotten the money: through a car title loan.
John said, “Ryan had gone to New Hampshire and taken out a six-month title loan for $800 on his $3,000 car. That didn’t sound right to me so I started asking him all kinds of questions: ‘Where exactly did you go? What is the annual percentage rate?’ Ryan didn’t seem to care that much since he was planning to pay off the loan quickly, but I know how abusive title loans can be.”
What Ryan didn’t understand is how an auto title loan differs from a conventional auto loan. Both are secured loans in which the lender places a lien on the automobile, but one major difference is interest rates are much, much higher on title loans than with conventional auto loans — well into the triple digits in many states — and frequently come with additional fees and “add ons” from the lender. Borrowers, specifically those already on shaky financial ground, can quickly find themselves trapped in a vicious cycle of snowballing debt as fees and interest add up.
Let’s use Ryan’s case as an example. The car was worth $3,000 according to his father. An $800 loan, with a possible $200 loan origination fee plus short-term interest of 18%, would result in a $1,030 loan balance right off the bat, which with many title loans, is typically due at the end of one month. Ryan had a six-month loan, so if he missed even one payment and his vehicle was repossessed, the lender would be free to sell the car immediately. Ryan’s kind-hearted loan to a friend could have left him without transportation had he defaulted on his loan agreement, which is easy to do with these loans. According to the Consumer Financial Protection Bureau, one in five consumers will end up losing their vehicle through repossession because they can’t keep up with escalating payments.
Ryan was lucky; Dad paid off the loan in the first month along with a $75 fee and avoided additional fees and high interest rate charges. Had Ryan come to his father for help first, together they could have formulated a plan to help Ryan’s friend and keep Ryan in a safe, secure position financially with no risk of losing his vehicle. Both young men could have also established a long-term relationship with a credit union and started building their credit history at the same time, something a title lender can’t offer.
Many people who are considering a title loan are at their wits’ end and are unaware that a credit union can help. Donna Brien, Hanscom FCU’s Assistant Vice President of Consumer Loan Operations, said, “Our minimum loan amount for a signature/personal loan is $500, as is our credit card, and both are unsecured, but we also offer secured loans and credit cards for those who have a little cash-on-hand and want the security of having that money. Our rates are risk-based, so the rate would depend on credit, but we’re still cheaper than any title loan lender.”
Brien also pointed out that the applicants don’t have to be a member of the credit union for a certain length of time, and a loan or credit card could also be an excellent way to build credit or repair it. “If they have an auto and have some equity in it,” she added, “another option is refinancing. It’s not a ‘title loan’ because we’re not chasing them weekly for the money…it’s a true auto loan.”
Credit unions are willing to listen and help members avoid the financial disasters that predatory loans can spark. Do your friend or family member a favor and let them know there are other options that are fair and won’t put their financial future at such risk.
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