Did you know that Dallas-Fort Worth has an old car replacement program that gives $3,000 vouchers to residents who turn in an old car and purchase a new one? Cars need to be at least 10 years old and the voucher must be used to purchase a new car. That’s right, they want Dallas residents to get rid of their old; but fully paid for clunkers and get a new car loan. Not only that; but the vouchers are only available to low-income and moderate income residents. The residents who can least afford any new debt. But according to an article in the Dallas Morning News, "surprisingly" participation in the old car replacement program has dropped by 40 percent.

Am I missing something here? Aren’t we in the middle of a recession caused by too much debt? What government entity would encourage its citizens to go out and take on new car loans, more debt, when companies are closing, going bankrupt and former employees are finding it nearly impossible to find new jobs? People are in debt up to their eyebrows and many are facing foreclosure. They don’t need new cars and they definitely don’t nee more debt. This program was originally designed to help Dallas-Fort Worth meet clean-air standards; but wouldn’t it be wiser to give vouchers for citizens to take public transportation?

As the economy slows an increasing number of consumers are upside down on their car loans. What that means is that they owe more than the car was worth. We haven’t heard about this issue as much as upside down mortgages; but upside down car loans are becoming a real issue as consumers struggle to pay their bills. The biggest problem is in the sub-prime car loan industry, where consumers with less than a 650 credit score take out car loans that average 61 months. The problem is that over the 61 months it takes to repay the car loan the vehicle has lost a significant percentage of its original value. After five years, the average vehicle retains only about 35% of its original value. This loss is important because it is at the five year mark that most people want to trade-in their vehicle and purchase a new one. According to Kelley Blue Book, in the first quarter of 2007, 29% of consumers were upside down on their car loans. So what do these consumers do with their upside down loan when they want another car? They roll the loan balance into a new car loan and once again end up owing more than the vehicle is worth. But the now reality is that the amount of credit available is continuing to contract and many consumers are finding it impossible to trade-in or sell their vehicle and cover the entire amount of the loan adding one more debt to America’s mounting pile of unpaid bills.

Texans take out millions of dollars in car title loans each year. But what may seem like an easy and logical short term solution for money troubles, often turns out to be a long-term disaster for financial health.

How Car Title Loans Work

A car title loan is usually a 30 day loan secured with your car title which you leave with the lender along with an extra set of keys. Anywhere from $601 - $2500 is loaned to the owner of the vehicle at a very high interest rate, as much as 25% for a month. At the end of the loan term (usually a month or less) the debtor must repay the loan plus interest. If the debtor is unable to repay the loan at the end of the loan’s term, the lender will accept the interest payment and rollover the loan to a new term with a higher interest rate. For example let’s say you take out a loan for $600 on November 1 st with a repayment term of 30 days. Let’s also imagine that the interest on the loan is $150. At the end of the 30 day term you would owe $750. If you cannot repay the full amount, the lender will accept the interest payment of $150 and rollover the debt to the next month. What this means is that you would owe $750 next month. The lender is only allowed to rollover a debt 6 times and as you may have guessed, most debtors don’t pay off their loans immediately. Let’s say that your loan was renewed 5 times. After five months of only paying the interest on this loan, you would have paid $750 in interest payments alone, never paying down the balance. If at that point you decided to payoff the loan you would pay $1350 for a $600 loan.

If you fail to repay the loan, the lender can repossess your vehicle and resell it to recoup their costs. They cannot sue you for the money.

Things To Consider

Before taking out a car title loan you need to consider all other sources of credit.

Do you have family members or friends willing to loan you money?

What about your credit card?

Consider all other options before taking out a car title loan because these types of loans are very expensive in the long run.

(source: http://www.responsiblelending.org/issues/cartitle/)