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Hell on Wheels: Snowballing Debt and How a Car Title Loan Might Make Things Much, Much Worse

Car Title Loans

When you’re strapped for cash, as the 76 percent of Americans who live paycheck to paycheck often are, little emergencies can cause big financial troubles and really wreck your life for a time. At times like these, 1.7 million Americans turn to car title lenders to get cash fast without a credit check.

A car title loan is very similar to pawning your car, which is why title loans are also known as title pawns. The main difference between a title loan and a pawnshop loan is that with a title loan, you only pawn the title, and you get to keep driving the car. You can’t pawn your Rolex and still wear it, because Rolex’s don’t come with a title of ownership.

Problem is, title loans are over-secured subprime loans. Over-secured means that the collateral you put up (your car) is worth far more than the cash you get for it (between 25 and 40 percent of its wholesale value.) Subprime means that you’re too poor or your credit score is too low to qualify you for a prime rate bank loan, and so for the privilege of borrowing money from title lenders, you’re charged an interest rate that’s so high it’ll give you vertigo – typically 25 percent a month, which translates to a 300 percent annual percentage rate, or APR. The APR indicates how much you’ll pay in interest over the course of one year.

Meet Buck

This is a semi-fictional story based on a number of real case studies from research published in the Missouri Law Review.

Our character is a young man named Buck, and we meet up with him on a sunny spring morning, flowers blooming and birds singing.

Buck opens his newspaper and sees that his favorite band on the face of the earth, a British heavy metal jazz trio called Bloodthirsty, is embarking on its first – and possibly only – U.S. tour. The closest venue at which they’ll be playing is in Chicago. Buck figures that for a mere $1,000, he can get a round-trip plane ticket to Chicago, the concert ticket, two beers, one Bloodthirsty Limited Edition U.S. Tour T-shirt, and a one-night stay at a nearby motel.

Problem is, Buck doesn’t have $1,000 lying around since he only makes $1,200 a month, and his rent, utilities, food, and other living expenses usually add up to a little more than that. But the tickets go on sale tomorrow and are expected to sell out in the first fifteen minutes. Buck looks around his apartment for something he can sell, but the only thing he owns of real value is his car. He Googles “make money fast” and finds himself at Acme Title Loans’ website. He reads the homepage, and he’s hooked:

Get a title loan today in as little as 15 minutes! At Acme Title Loans, you can get hard, cold, cash without a credit check or proof of income! And the best part is that you get to keep driving your car for the duration of the loan! Maybe you have enough money to get by, but need some extra money for something special. Or maybe you need a little extra cash to hold you over until payday. There are lots of ways to make money, but none of them are faster than an Acme Title Loan!

A half hour later, Buck shows up at Acme Title Loans to get some extra money for something special. He fills out a few forms while someone inspects his car to determine its value, which turns out to be $4,000. The lender offers him the exact amount he needs for a loan term of 30 days. Buck hesitates for a brief second, wondering how he’ll pay it back, but then he thinks about seeing Bloodthirsty live and decides he’ll worry about paying it back when the time comes. He’s sure he’ll come up with something. So he hands over the spare set of keys and the original title and heads home to book his flight and purchase the Bloodthirsty ticket.

One month later…

The $1,000 loan is now due, along with $250 in accrued interest. Buck didn’t have $1,000 lying around last month for the Bloodthirsty tour, and he doesn’t have $1,250 lying around this month for his loan. He pays only the $250 in interest and rolls over the principal. Buck can only pay half of his utility bills this month, but he’s confident that he’ll catch up next month.

One month later…

Buck really enjoyed himself at the concert, but he gets back home to face the loan balance due of $1,250. He spent a little more than he expected on his trip, so he skimps on the utilities again and pays the $250 in interest that accrued last month and rolls over the loan just one last time. He’ll stay in on the weekends next month and eat cereal for dinner each night, no problem.

One month later…

Buck got a disconnect notice from the electric company, so he had to pay the bill in full, but he held off on the gas bill and paid just half of his phone bill so that he could afford the loan’s $250 interest payment. He’ll have to roll over the loan one last, last, last time. For the next month, he’ll stay home on the weekends and eat cereal for dinner for real.

One month later…

Buck’s gas got shut off. To get it back on, he had to skimp on the rent, but the landlord bought his story about being unable to work for a week due to a head injury, so Buck was still able to make the $250 interest payment on his title loan. Barely. Buck suddenly realizes that although he’s already paid back the $1,000 he borrowed from the title lender, he still owes $1,250 by the end of next month.

One month later…

Buck’s phone got shut off, and his landlord isn’t happy that he didn’t pony up the other half of last month’s rent. In order to get his phone back on, he skips the electric bill, pays half of the gas bill, and still makes his $250 interest payment, but he has to roll over the principal…again. He can only roll it over once more,

One month later…

Buck’s car broke down and he had to get it fixed so he could get to work. He was only able to throw a little money at the utilities this month, and he made up an epic story about why he could only pay half the rent again, but promised to catch up next month.

Buck isn’t sleeping so well these days. Every time he hears someone enter the building, he’s terrified that it’s the landlord coming to evict him or someone coming to shut off his gas or electricity. By the end of the month, he’ll owe two months’ worth of rent and utilities plus the $1,250 loan payment, which can’t be rolled over again. Buck has no earthly idea how he’s going to pull that off, but he’s sure something will come up. At least he was able to make his interest payment, so he still has transportation.

One month later…

Buck is screwed. He’s eating cold noodles in the dark every night and showering in icy cold water every morning, and the landlord has started eviction proceedings because Buck had absolutely no choice but to pass on paying the rent and utilities again in order to pay off the title loan and avoid repossession of his car. He has to be out of the apartment in two weeks, and the landlord is going sue for back rent. Buck won’t be able to get utilities in his name again until he pays the past due amounts plus a deposit, but it doesn’t really matter at this point, because he doesn’t have the cash he needs to rent a new place anyway.

But at least Buck still has his car! So he packs it full of what he can fit in there, and he parks it under the 14th Street Bridge. Welcome home, Buck! At least you have fond memories of your $2,750 Chicago trip, and you still have your Bloodthirsty Limited Edition U.S. Tour T-shirt. No one can take that away from you, buddy.