Consumers should be wary when considering using their car as collateral to secure a loan. These so-called car title loans cost borrowers more than $3.6 billion in interest annually, more than double the $1.6 billion in credit owed, according to a new report from the Center for Responsible Lending, a nonprofit, nonpartisan research and policy organization. Car title loans, which are typically structured as small, 30-day personal loans where the car's title is used as collateral, are dangerous to consumers because they often have a triple-digit loan interest rate and a balloon payment at the end of the loan's term, a recipe for putting struggling consumers into deeper debt.
The report noted that the average consumer obtaining this type of loan receives cash equal to 26 percent of his or her car's value, yet pays a 300 percent APR. In addition, these consumers typically renew the loan eight times, paying $2,142 in interest for $951 in credit.
Tara Baukus Mello writes the cars blog as well as the weekly Driving for Dollars column, providing both practical financial advice for consumers as well as insight into the latest developments in the automotive world. Follow her on Facebook here or on Twitter @SheDrives.