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Why Pawnshops and Car Title Loans are a Bad Deal

What if you desperately need $1,000 to get through the semester? You could pawn your TV or iPad to get quick cash, but pawnshops usually pay only a fraction of an item's value. Your most valuable possession is your car, and you've heard that a local pawnshop makes car-title loans. Beware: You'll be able to borrow only a small portion of your car's value—and you could lose ownership of the car if you fail to repay the loan according to the agreed-upon terms.

Here's how these loans work: Say your car is worth $5,000. The pawnshop gives you $1,000 in exchange for the title to your car. You agree to pay back the loan in six months, plus 10 percent interest for each month of the loan. Your $1,000 loan costs you:

  • Loan amount = $1,000
  • Interest charged = 10 percent a month for six months, or $600
  • Total cost = $1,600

That's $600 in interest for a six-month loan! If you miss payments, you'll pay even more. Because the pawnshop holds the title, it could have your car repossessed—plus charge you a repossession fee. Add to that a storage fee if the pawnshop stores the car on a lot. If you fail to pay all of these fees, the pawnshop has the right to sell your $5,000 car and keep all the money from the sale. That's too high a price for a $1,000 loan.

Consider alternative ways to find the money you need before you decide to enter into a loan situation that could further hurt your financial situation.

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