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 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.
