Alabama Title Pawns Are Non-Recourse Loans – The Advantages and Disadvantages

March 29, 2012 by  Filed under: Loans 

The state of Alabama regulates title pawns through the Alabama Pawnshop Act. Under the provisions of this law, title pawns are classified as non-recourse loans. There are benefits and disadvantages to non-recourse debt, so before you borrow, be sure you have a full understanding of these types of credit options.

Recourse Loans:

A recourse loan is debt that is not secured by collateral. Because there is no security for the loan, lenders are entitled to collect a borrower’s assets and pursue legal action against the borrower for failure to repay the debt.

Non-Recourse Loans:

The state of Alabama classifies title pawns as non-recourse loans. This means that the collateral (ie. the vehicle) pledged as security for the loan is the lender’s only way of recouping the debt amount in the event the borrower fails to repay. In a non-recourse loan, the lender is not entitled to legal action against the borrower.

For title pawn customers, this is a benefit. Failure to meet the terms and the conditions of the loan does not result in a lawsuit against a borrower. However, it does result in repossession of the vehicle. Since title pawns use a borrower’s vehicle as collateral, defaulting on the loan means the vehicle becomes the property of the lender.

The disadvantage of non-recourse loans is the loan-to-value ratio. The loan-to-value ratio is the amount of the loan compared to the appraised amount of the collateral. Lenders, and in this case, pawnbrokers, are not as interested in your collateral as they are in your payments. They want the loan to be repaid. They do not want to pay to have a vehicle repossessed, nor are they interested in the costs associated with reselling the vehicle to cover the unpaid debt.

For this reason, lenders place some padding in the loan-to-value ratio. Many non-recourse loans are limited to 50%-60% of the actual value of the collateral. Meaning that if your vehicle is worth $10,000, title pawn lenders may only give you a $6,000 loan. If the loan is not repaid, then the lender can repossess the vehicle, acquiring not only the $6,000 to repay the loan, but also an additional $4,000 because the value of the vehicle was more than the debt of the loan.

Alabama law Section 5-19A-6 states, “Pledged goods not redeemed…shall be forfeited to the pawnbroker and absolute right, title, and interest in and to the goods shall vest in the pawnbroker.” In other words, the pawnbroker is not required to sell the repossessed vehicle, deduct his costs ($6,000) from the proceeds and give the remaining profit ($4,000) to the borrower. Title pawn lenders are entitled to the full amount of the collateral, even if the collateral’s value exceeds the loan debt.

Title Loan and Title Pawn Rescue in Alabama  

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