Auto Title Loans: For this type of loan, your car title is used as collateral

Auto Title Loans: For this type of loan, your car title is used as collateral

If you fail to pay your loans, including all interest and fees, your car becomes the property of the lender. Auto title loans have been banned in 26 states, while 12 others have caps on rates and fees. Members of the military have a nationwide cap of 36% APR on any loan.

  • Pawnshop Loan: This loan uses other valuable items besides your car as collateral. You must physically bring your valuables to the pawnshop for their value to be assessed. Normally, a pawnshop will lend you 50% of the estimated value. If borrowers do not pay back the loan plus interest and fees by the agreed time, the pawnshop has the right to sell the pawned items.
  • Refund Anticipation Loan (RAL) or Refund Anticipation Check (RAC): Both RALs and RACs are loans based on expected tax returns. The main difference between the two is that RALs use your expected tax refund as collateral while RACs use access to a temporary bank account, which they help you set up for the purpose of receiving your tax refund as payday loans in Trezevant TN a direct deposit from the IRS. According to McKernan et al. (2010), fees for RALs and RACs include tax preparation (about $187), account setup ($30 to $35), document preparation, processing, e-filing, and technology fees (e.g., $40 for “data and document storage”); these costs may translate to an effective APR of up to 700%. It is estimated that about 18% of tax filers have used RALs or RACs (McKernan et al., 2010). Sadly, these costly loans only save a typical borrower between 9 and 15 days of waiting as compared to a traditional tax refund via check. Consumers can avoid these charges and still receive their tax refunds by having a bank account and completing their taxes with free tax preparation sites (e.g., Volunteer Income Tax Assistance from the IRS).

Used correctly, some of these small-dollar loan services may be a lifesaver

  • Rent-to-Own (RTO) Agreement: The concept of an RTO agreement is simple: You rent a good at a very low periodic (e.g., weekly, monthly) rental amount for a specified amount of time to own the good. Under this agreement, goods return to the store if (1) a renter decides to discontinue renting the goods or (2) a renter cannot fulfill the rental as agreed. An example of a rent-to-own agreement is getting a $220-television by paying $10 per month for 78 months. That translates to paying $780 for that television, or paying 220% APR interest on the loan.

As consumer advocacy groups try to curb these predatory practices, the predatory lending industry has evolved. For instance, there have been online payday loan companies owned and operated by Native American tribes that claim to be sovereign from state and federal laws, although they make loans to non-Native Americans living outside of Indian lands. Bottom line: Payday loans come from many places and can be called many things. Look for red flags such as large fees (relative to the loans made), penalties for paying loans off early, questionable marketing practices, and exploding interest rate clauses.

Advantages of Small-Dollar Loan Services

Overall, people like to use these small-dollar loan services because of their convenience. The small-dollar loan establishments are usually located in high-traffic areas. You can obtain the small loans quite quickly compared to banks because these small-dollar loan providers do not require any credit or background check. With the right collaterals, you may obtain your loans in 30 minutes. This is especially useful for individuals who are in need of money instantly (e.g., for prescriptions, car repairs).

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