Car Title Loans: Over Secured and Under Regulated

Car Title Loans Over Secured and Under Regulated

When an emergency strikes and you need cash fast, you may consider taking out a car title loan, which is also known as a title pawn because the process works much the same as pawning, say, your $2,000 Fender Telecaster:

You: I’d like to pawn this here guitar. I bought it three years ago for $2,000.

Cranky pawnshop guy: I’ll give you $500 for it.

You: Say, whaaaa?

An over secured loan means that the collateral you put up is worth far more than the loan amount you get. Title lenders will typically offer you between 25 and 40 percent of your car’s wholesale value, and if you don’t know any better, you’ll probably argue about it, and they’ll tell you the same thing they told the last fifty customers, the same thing the cranky pawnshop guy told you: They’re not going to give you the full value of your car, because if you default and they end up having to sell it, they need to be able to cover the principal, plus interest, plus make a profit.

Title Loans in a Nut Shell

If your credit score is lower than your age, you’ll never qualify for a traditional, low-interest bank loan, and you won’t qualify for a credit card, either. So in the event of an emergency – your car breaks down on the way to work or a death in the family requires your immediate presence in Des Moines – your only real lending options are subprime loans, which are specially formulated with outrageously high interest rates for the exact people who can least afford them.

Although Federal law mandates that interest rates must be expressed in the annual percentage rate, or APR, a recent study conducted in New Mexico found that most title lenders don’t comply with the law, and in fact, most employees of title loan companies couldn’t (or wouldn’t) convert the monthly rate to the APR when asked. Which is kind of adorable, because seriously, all you have to do is multiply the monthly interest rate by the number of months in a year. But the Federal government has other, more important fish to fry than protecting the financial interests of people who can’t afford to contribute to a political campaign, so the law is largely ignored by both the lenders and the Feds.

A typical interest rate of 25 percent a month adds up to a 300 percent APR, which is designed to keep customers rolling over the loan for months on end. At the end of each 30-day period, the accrued interest must be paid, but the principal can keep rolling over to the next month, and the next, and the next.

So let’s see what that looks like on paper. You need $3,000 this week for an emergency root canal, so you take in your prized VW, which has a blue book value of $15,000. The lender visually inspects the car – pops the hood, kicks the tires, sniffs the upholstery – and tells you it’s worth $12,000. You beg to differ, but title lenders are inured to differ-begging, so save your breath, because you’ll need it to curse their name to the high heavens in a few months.

The lender says he’ll give you $3,000, which is good, since that’s how much you need. But it’s also not good, because to get that $3,000 for your $15,000 car, you have to hand over the original, lien-free title along with an extra set of keys so that nobody will break a nail when it comes time for them to repossess your car.

The end of the first month rolls around much more quickly than you expected, and you don’t have enough money to cover the $3,000 principal plus the $750 in interest. No worries! Just pay the interest and worry about the principal next month.

If you’re an average title loan customer, you’ll roll over the loan eight times. Let’s say that in this case, eight months is the lender’s rollover limit. At the end of the eighth month, you will already have paid $6,000 in interest, and you’ll still owe the $3,000 principal plus the last $750 interest payment. Grand total for your $3,000 root canal? $9,750. Even comprehensive dental insurance costs less than a title loan.

Beware the Repo Man: The Jaws that Bite, the Claws that Catch

But what if you can’t come up with the remaining balance of $3,750 at the end of the eighth month? Well, you might want to download a bus schedule, because soon enough, you’re going to wake up to find your car gone.

The lender sells your VW at auction for $13,000 and takes out the $3,750 you owe, which leaves $9,250. If you get a check for the remaining balance, you’ve recouped the money you paid on the loan, but you’ve lost your car and almost $6,000 worth of equity in it.

But whether or not the lender sends you the balance is a crapshoot. A handful of states require title lenders to pony up the extra dough to the borrower, although you may have to take the lender to court to get it. However, most states regulate title loans under their pawn laws, which means that the lender is legally allowed to rob you blind, and that $9,250 will become icing on the lender’s profit cake while effectively ruining your life for the foreseeable future.

And just how big is that profit cake, you ask? It’s $3.6 billion a year big – three times as big as the $1.6 billion they lend.

Predatory Lenders “R” Us

Predatory lending is any lending practice that leads to unfair loan terms on a borrower, and title loans are predatory lending at its very worst. Although a number of heavy-hitting organizations like the Center for Responsible Lending and the Consumer Federation of America have lobbied tirelessly to raise awareness among lawmakers about how unfair predatory lending practices ruin a lot of lives, lawmakers in the 16 states that refuse to cap interest rates on title loans simply don’t care. The poor are not their problem, and they’re not about to start fiddling with the profits of title lenders, who are backed by the giants of the banking industry, which -as we all know – are Untouchable.

James Speer, the executive director of the Virginia Poverty Law Center, is a notorious critic of lawmakers who refuse to tighten regulations on title lenders, whom he regards not as lenders, but as loan sharks. He and a number of other outspoken critics of title loans want states where these loans are legal to cap their interest rates at 36 percent APR, set a maximum amount for allowable charges, require that costs be spread out evenly over the life of the loan, and protect low-income consumers against unfair and harmful repayment and collection practices.

Until lawmakers act on these recommendations, it’s in your best interest to stay as far away from title loans as possible, and use your innate resourcefulness to find alternative ways to come up with funds when an emergency strikes. But don’t hold your breath for lawmakers to take action.

Instead, look into ways you can save a little money each month, and start stashing away an emergency fund now. Apply for overdraft protection from your bank to cover those small, unexpected expenses that can easily explode into an avalanche of debt once you sign the dotted line on a title loan.

Car Title Loans and the Law

Car title loans are often masked as small emergency loans. As people in need are left without much of a choice, they end up falling for this trap. Not knowing that this might put them into a cycle of debt that will, in the end, end up with their car being seized. 

I may sound too negative here, but this is a sad fact that we all refuse to acknowledge. Of course, there are exceptions if you can manage your payments successfully. Or say, you are already expecting a big sum of money to come in but you need it ahead of time so you put up with a car title loan.

Anyway, the payment scheme that car title lenders usually follow ends up with the borrowers paying a lot higher than the amount that they intend to borrow. Since they badly needed the money, they were forced to agree to the terms.

Because of the risks involved, high-priced title loans are considered illegal in most states. However, as the demand for car title lenders continues to grow, the law has somehow fallen short in ensuring that the borrowers are protected when they enter this kind of agreement.

Most title lending companies are found guilty of tax evasion and abusive practices, so states that allow car title loans must ensure that they have strict legal requirements in place for these companies.

For example, they must ensure that title loans have longer loan terms. They should at least provide borrowers with an affordable installment repayment schedule and avoid the one-time payment required on a short period after the loan has been processed.

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