Many Americans, looking for some quick extra cash, are turning to car title loans, which could end up costing them their cars. This kind of loan requires the borrower to hand over not only the car title, but also a set of keys.

Lenders usually require that the title to the car is free and clear before they will give the loan, and the lender determines how much the consumer can borrow. Loans are rarely given for more than 33% of the car’s value, which means the lender really comes out ahead if the borrower defaults.

The typical car title loan requires repayment within 30 days and usually charges an interest rate of about 25%. If the loan isn’t paid at the end of 30 days, another 25% is charged, similar to the payday loan process. That’s about 300% annually. Of course, the real danger is that if the borrower can’t repay the loan within the contract terms, he or she loses the car. That’s a pretty big loss for the sake of a few hundred dollars.

It’s estimated there are more than 15,000 title loan shops in the U.S. with very few states having laws in place to regulate their practices, including reimbursing the borrower if the car is sold for more than what was owed. If you are considering this type of loan, don’t! Please talk to your FFEF counselor for accurate information about the liabilities attached to these loans. If you don’t have $500 today, how will you have it 30 days from now?

It’s Not Your Neighborhood Merchant Anymore

While the idea of avoiding the public exposure of walking into a check cashing store by applying for a loan online can be tempting, consider what you might be sacrificing. You will be required to fill out an application that asks for your personal information, employment information, banking information, and references. The lenders usually require that you have had a job consistently for three months, you earn at least $800 per month after taxes have been deducted, and you’ve had a valid checking account for at least three months.

If you are approved, you will be asked to sign a copy of the lender’s contract stating that you agree to the fees and terms of the loan, and you will be asked to fax your pay stub, bank statement, and a voided personal check. So where does all this information go? That is often the big question.

Many online payday loan companies aren’t lenders at all. They are simply looking for sales leads and connecting potential customers who need fast cash with lenders who have money to loan. That means your information is doing some traveling of its own.

Payday lenders must have a state license to operate. Some states will not issue a license to any company for the purpose of issuing payday loans. That doesn’t mean that a company with a license in one state can’t do business with a customer who lives in another state, but because the company is licensed in one state only, the laws of that state apply to any customer. If you choose to do business with a lender in another state, your state’s laws won’t protect you. Be sure you know what you’re getting into.

Many of these online lenders are outside the United States, which means they may not even be subject to American laws. There are Internet payday lenders in Canada and on islands in the Caribbean that can be very difficult to find when you start having problems with the way they are handling your loan. If you do think about applying, be sure you can find someone to communicate with before you fill out anything.

Online lenders can renew your loan automatically by withdrawing the finance charge electronically from your bank account every payday. If you don’t have enough money in your account to cover both the finance charge and the amount borrowed, both the lender and the bank will charge you insufficient funds fees.

Does that mean all these businesses are suspect? No, it doesn’t. What it does mean is you should find any alternative you can before heading down this road. If you can come up with $45 a month in fees, you should be able to deposit that $45 a month in savings so you don’t have to borrow.

The Better Business Bureau offers these warnings:

• Watch out for “guaranteed” loans that require a fee in advance. Such loan scams are illegal. Legitimate lenders never guarantee you will get a loan before you apply.
• “Work at home” schemes, such as stuffing envelopes, medical billing or check processing, will entice you with promises of lucrative jobs and then may take your money. If you take work as a “check processing agent,” you may end up being responsible for thousands of dollars in bad checks.
• Be suspicious of sweepstakes notices or prize offers. If you respond to a “you have won!” notice, you may be asked to pay a fee of some sort and/or provide personal information or bank account numbers. Some so-called sweepstakes send out counterfeit cashier’s checks. The “winners” do not find out the checks are bogus until weeks later.