Payday auto loans are loans where a vehicle is used as collateral to borrow money from a lender for what is usually a short term period of time. This is similar to pawning your car for cash, but you won’t have to actually leave your vehicle with the payday auto loan provider. It’s important to be careful when utilizing payday auto loans as you will be putting one of your most important assets at risk, namely your means for transportation.

Facts about Payday Auto Loans

  • The average interest rate of a payday auto loan is 300% or greater. Although this rate may seem high, if you pay off the loan in a short period of time the interest becomes negligible.
  • Almost one quarter of all payday auto loans are renewed multiple times before they are paid off. This can be a slippery slope indeed. Failing to pay off your loan the first time will amount in interest being paid on interest already owed.
  • Payday auto loan lenders will renew 3 times as many loans as new loans created.
  • Almost half of all states have banned this type of loan. The states that remain have a huge growing market for this type of loan.

How Payday Auto Loans Work

Typically lenders will only borrow about 30%-50% of the vehicles value. This allows lenders the security they need to make loans freely available to everyone. The borrower will typically have to repay the entire loan amount in one lump sum payment after a few weeks and usually no more than one month. If the borrower is unable to repay the lender they can either roll the original loan (plus interest) into a new loan or allow the lender to repossess their vehicle. Can you guess what option most people choose?

Payday Auto Loan Pros

  • Fast Money- You can get the money you need fast. This can be a real life saver, assuming you plan to pay the money back on time.
  • Easily Approval - Like most secured loans, approval is much faster and easier than traditional loans.

Payday Auto Loan Cons

  • Rollover - Many times borrowers are unable to repay their loans within the original time frame. If a borrower continue to rollover their loan time after time they may end up paying more in fees and interest than the original loan amount.
  • High APR - Because payday auto loans are meant to be short term, many lenders charge extremely high interest rates. Rolling over a loan only further compacts the interest accumulated on a loan.
  • Losing your Car - If you thought things were bad before when you just needed some money to get by, how are you going to feel once your car is repossessed? If you choose not to pay back your loan on time and ignore the lender you could be in for a rude awakening.
  • Loss of Equity - Not only will a lender take your car, they will probably profit on it as well. Your original loan will only be 30%-50% of your vehicles value. If your vehicle is repossessed and sold the lender keeps any profit made.