Finova Financial Review: Auto Equity Loan

Florida-based Finova Financial wants to reduce the cost and hassle associated with a car title loan, CEO Gregory Keough says.

Finova loans are advertised as lines of credit, but they differ from the revolving credit associated with a credit card or personal line of credit because you get your loan amount in a lump sum, not as a credit limit.

Finova says its loans are designed to address the major drawbacks of car title loans, which typically cost 300% APR and are due in a few months, leaving many borrowers in a debt spiral or at risk of losing their vehicles, according to a 2015 report by the Pew Charitable Trusts. Lenders also require an in-person visit to complete the loan application.

Finova offers a longer loan term, lower rates and an online-only application, Keough says. Borrowers still risk losing their vehicle, but Finova says it tries to work with borrowers who have trouble making payments before they get into a default situation.

How to qualify:

• Have a credit profile.

• Have a fully paid-off vehicle with proof of comprehensive and collision insurance coverage.

What does a Finova loan cost?

On average, a Finova customer borrows $1,700 and qualifies for an APR of 22.5%, according to the company. Finova’s stated APR ranges from 17% to 30%, but adding fees and the cost of insurance for a $1,700 loan, the effective APR is actually 187%.

Here's a breakdown of the costs associated with Finova loans:

• Extra fees: Not all fees are included in the APR you receive. On top of the rate you qualify for, you'll have to pay a $25 “credit investigation” fee.

• MoneyGram fees: Many of its borrowers don't have bank accounts, Finova says, so borrowers typically use MoneyGram locations to make their loan payments. MoneyGram charges a flat fee of $11.50 per payment for amounts below $900. (Finova also allows payments via debit and credit card).

• Insurance costs: Finova requires borrowers prepay for 12 months of comprehensive and collision insurance or buy an optional form of insurance from the company, known as a “debt cancellation addendum.”

Unlike comprehensive and collision insurance, this optional feature covers only your loan payments if your car is damaged or totaled. It doesn't cover the cost of repairing your car in case of an accident.

The cost of Finova’s addendum is almost equal to the loan amount a borrower is approved for, the company says. A part of your monthly loan payment goes toward the addendum for the life of the loan. The addendum can greatly increase the cost of your loan. For example: Consider a $1,700 Finova loan that is secured by a 2003 Toyota Camry, due in 12 months. Finova’s addendum for 12 months would add $1,700 to the cost of the loan.

Looking at the alternative, here’s the cost of 12 months of comprehensive and collision coverage in the six states Finova serves, according to NerdWallet’s car insurance tool:

• Arizona: $298.90

• California: $310.10

• Florida: $305.50

• New Mexico: $327.80

• South Carolina: $235.70

• Tennessee: $353

(Our calculation assumes a female driver age 37 with a poor credit score and a good driving record, which is how Finova describes its typical borrower. All states also require liability insurance.)

In each of the states, the cost of the coverage is much less than the $1,700 Finova addendum, but it must be prepaid — something few borrowers can do. As a result, 80% of borrowers choose the more expensive Finova addendum, the company says.

Alternatives to Finova

While they are significantly cheaper than traditional car title loans or payday loans, Finova loans are still an expensive option.

Depending on your credit history and the condition of your vehicle, you could qualify for an auto equity loan from a bank or credit union or a secured loan from an online lender. These loans have a maximum APR of 36%, and repayment terms span several years.

If you have bad credit, NerdWallet recommends exhausting cheaper alternatives first, even in an emergency:

1. Ask family and friends for a loan through lending circles or a loan agreement.

2. Seek assistance from local nonprofits, charities and religious organizations.

3. Get a payday alternative loan from a credit union.

4. Ask your employer for a paycheck advance or use an app like Earnin.

5. Get a pawnshop loan secured by something you own.