The new big trap for consumers is auto title loans. This is not the kind you take out when you buy a car. An auto title loan gives you cash against the value of the car you already own.
You turn over the title to your car to the lender. When and if you fail to make payments, he takes the car.
At some point, the lender may sell your car in the used car market. Remember, he has the title. He pockets all the money you have already paid him. In addition, he gets to keep the money from the sale of the car. He is getting rich. You are without wheels to get to work, go shopping and drive the kids to school.
More likely, he is turning your unpaid debt and the collateral of your car into a commodity he will sell to a bank. It is called bundling. These debts are sold by Wall Street firms to investors. It is the kind of activity that led to the Great Recession of 2008.
Wall Street is rock solid behind these high-profit transactions. It is also urging lenders to make car loans to low credit score buyers – at high-interest rates. This sells more cars and creates high-interest loans. If you do not lose your car to the finance company that made you a purchase loan when you bought the car, they are counting on you to lose it to the firm that later made you a loan based on the value of your car.
People are borrowing against cars they already have paid off. They are using the money to pay mortgages, medical bills and other debts. The loans carry high-interest rates, ranging up to 300 percent a year. More than 1.1 million households used auto title loans in 2013.
Consumers are warned. If you take on an auto title loan and then default on the loan, you risk losing all the money you have paid as payments, as well as the car itself.
The federal government is beginning to look into the practice.
Source: The New York Times January 30, 2015
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