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An Explanation Of The Country’s Two Most Dangerous Loan Products

moneyIn today’s difficult economic climate many people have been effectively shut out of the credit markets. When this situation happens to an individual many different situations may be to blame. Some of the reasons someone may find themselves locked out of traditional credit markets include:

  • Divorce causing credit issues
  • Loss of work causing credit issues
  • Disability causing someone to be unable to keep up with bills

Regardless of the specific reasons, the fact is that there are literally tens of millions of Americans who do not have adequate access to credit. This has caused an explosion of credit solutions designed to service this market. But of all the solutions in the market, two are notorious for their huge potential downsides. Here we will take a look at those two loan products – the title loan and the payday loan. .

Title Loan

If you are a car owner you know the feeling you felt the day you paid off your car, and were finally awarded the title. The car was finally yours – you didn’t owe anyone a cent. With a title loan you effectively refinance your fully paid car and put yourself back into a debt position. The reason people take title loans is usually because they are in desperate need of quick cash, and fully expect to be able to repay the loan in a timely manner. Though different states regulate title loans differently, it is not uncommon to see interest rates up to 30 percent or more. Additionally, depending on the loan company and state, defaulting on any portion of the loan could mean that you will lose your car completely – even if the car is worth more than the remaining balance on the loan. So here we have a high rate loan, which is harder to pay than a lower rate loan, and loss of the car as the ultimate possible consequence.

What can I do? If you find yourself falling behind on a title loan, first be sure to familiarize yourself with the company’s repossession polices. Call the company to explain the situation and ask for an extension. Ultimately it may be better to borrow the money from a relative than to lose the car outright.

Payday Loan

Payday loans are also meant to help people who have a steady income and need cash fast. As the title indicates, these loans are meant to be a kind of stop-gap until your next paycheck. In many states payday loans carry an effective interest rate which is far above that for other loans – sometimes over 200 percent per year or more. This is because the payday loan model is usually based on repayment in 2 weeks or less. If you cannot repay the loan within the 2 week period the loan will “roll over,” with additional fee charges being the result. For example, if you are charged a $20 rollover fee every 2 weeks on a $200 loan, that amounts to 10 percent every two weeks. Within a month and a half you will have paid far more in interest than the average investor earns in a year in the stock market.

What can I do? If you find yourself behind on a payday loan it is very unlikely that the company will stop interest charges or fees. However, you may be able to negotiate a settlement which waives some fees in exchange for a complete one-time payment of the settled amount.

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