Home The Problem With Payday and Auto Title Loans

The Problem With Payday and Auto Title Loans

The Problem With Payday and Auto Title Loans

The high cost and structure of these loans often trap borrowers in a cycle of debt where they continually pay fees and interest but never pay down the loan. In spite of the short initial term of the loan, borrowers can be stuck paying for months on end. When combined, fees and interest often reach annual percentage rates (APR) of over 500%.

For example, a borrower who takes out a $300 payday loan will owe $361 at the end of the initial two week term. If they cannot pay that full amount, they can pay only the fee and interest portion of the loan, $61, and extend the due date two more weeks and again owe $361. No partial payments of principal are accepted. Fees are typically $20-$25 per $100 borrowed and paying the fee to extend the term does not reduce the principal of the loan.

Data from states across the country show that the average cost for a $300 loan is actually $840. Auto title loans function in a similar manner, but can cause even more damage, as the amount loaned is generally higher and the car will be repossessed if payments are not made. In Texas a $4,000 auto title loan can result in a borrower paying $1,200 per month in fees and interest for months on end, never reducing the amount owed.

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