Car Title Loan Scenario - Money Smart CBI

FDIC Money Smart Loan to Own ? Study Aid for Adults

Car Title Loan Scenario

If you would like, print this study aid for future reference. Imagine you have $500.00 in unexpected medical expenses and you need a loan. You saw a television commercial last week that declared, "If you have a car, you can get a loan." Your car is worth about $2,500.00, so you decide to apply for the loan. The finance company mentioned in the commercial loans you $500.00 at 20 percent interest per month. In return, the finance company takes your car title as collateral, but you keep the car. With a 20 percent monthly interest rate on the $500.00 loan, you owe $600.00 at the end of the month--the $500.00 loan plus $100.00 in interest. Now imagine that you cannot repay the $600.00 at the end of the month. The lender could repossess your car. However, the lender allows you to pay the $100.00 interest and gives you until next month to pay the loan. At the end of the next month, you still owe $600.00 ($500.00 loan + another $100.00 in interest). If this pattern continues for a year, you will pay $1,200.00 in interest for the $500.00 loan--$100 every month = $1,200! This equates to a loan with a 240 percent APR. This is a very expensive way to borrow money! You could have looked into alternatives that had a much lower APR such as an installment loan or possibly even a credit card. This would allow you to pay off the $500.00 loan sooner and pay much less interest.

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