Car title loans, also known as title loans, title pawns, and pink slip loans, are notorious for the high risk they pose to the borrower and the astronomical interest rates lenders charge for these teeny, tiny short-term loans.
Exactly how high is the interest, you ask? Well, how does 25 percent a month sound? That’s pretty high, but if you need a $1,000 car repair today in order to keep your courier job, and you can pay back the loan in full at the end of its 30-day term, paying $1,250 in exchange for a working car and job security might be worth the extra dough.
But if you’re just an average, hard-working American who lives paycheck to paycheck like 76 percent of us do, you probably can’t afford to pay back the entire loan in 30 days without having to neglect other bills or forego necessities like medicine, food, or gasoline.
And therein lies the rub and the reality of car title loans: in a real emergency, you’re willing to take your chances, and chances are, you’re going to roll over the loan at the end of its 30-day term. And if you’re like the average title loan customer, chances are you’re going to roll it over seven more times after that. And there’s a decent chance you’ll be one of the 16 percent of title loan borrowers who carry the debt for a year or longer, and after that, the chances are pretty good that you’ll be the one borrower out of every six who looks out one evening to see your car heading into the sunset on a flatbed trailer.
What a 25 Percent Monthly Interest Rate Really Means
Federal law requires lenders to express interest rates in terms of APR, or annual percentage rate. The APR is the total amount of interest you will end up paying on a loan over the course of one year. The law even goes so far as to tell lenders what font size to use for the notice and where to place it in their store. But none of that really matters, because a recent study published in the Missouri Law Review found that most lenders don’t comply with the law anyway, and nobody attempts to enforce it, so whatever. What can you do? You know what happens when the banking industry flips both middle fingers at the Feds.
Exactly. You’re on your own, pal, you’ll have to do the math yourself, because the study also found that most employees of title loan companies “were not able to convert the daily or monthly interest rate into an annual percentage rate.” Really? They can’t grab a calculator and multiply the monthly rate by 12 or the daily rate by 365? Or is it that lenders really don’t want you to know what the APR is because they know you’ll do a coffee spit take and ruin your nice new mohair sweater?
A 25 percent monthly interest rate translates to a 300 percent APR, because twelve months times 25 percent a month is 300. So that $1,000 title loan you took out to have your fuel pump’s power train air gasket de-gunked may cost you $250 in interest at the end of one month, but at the end of twelve months, it’s going to end up costing you $3,000. Remember, that’s just the interest. You’ll still owe the principal amount of $1,000.
A Lose-Lose Situation
If you’re already struggling to stay on top of your bills, it’s pretty unlikely that you’re going to find an extra $1,250 lying around in the next few weeks to pay off your title loan. If that were a possibility, you probably wouldn’t have had to take out a title loan in the first place.
Here’s what’ll likely happen after you take out a title loan. Thirty days will pass faster than you can say, “Oh, crap,” and you’ll call the lender to explain that you can’t pay and to ask them to please not place a decapitated horse head on your pillow. They’ll be super nice about it, because this is what they have been banking on all along, and now they’re going to make a tidy profit at your expense.
They’ll tell you that you can just pay the $250 in interest that accrued this month and worry about the principal next month, at which time you’ll also, by the way, have to pay additional 25 percent interest. You’re totally relieved, because $250 is a lot less than $1,250, and now you have an extra month to come up with the $1,250 – for reals this time.
Except that you don’t, because you have to eat, and you have to pay your bills, and you have to have gas in your car, and you can’t just magically make more money appear in your bank account each month.
So at the end of the second month, you pay the $250 in interest that’s accrued in the last 30 days, roll over the principal again, and renew your personal commitment to paying off the $1,250 next month for sure. And this cycle continues until you either pay off the loan or one of two things happens.
#1. You reach the lender’s limit for the number of times you can roll over the loan, let’s say eight months in this case. You either pay the loan, and it’s over and done with for a grand total of $3000 plus fees to pay back the initial $1,000, or you default on it and wake up one morning to find that your only means of transportation is attached to your ankles.
#2. You just keep rolling the loan over and over and over again until suddenly it’s been eighteen months and you realize you’ve paid $4,500 in interest on a $1,000 loan and still owe $1,250. You decide then and there that you’d rather just have the bastards take your car than keep paying $250 a month for absolutely nothing, just throwing $250 into the wind every thirty days, tra, la, la, nothing to show for it but psychic wounds and more than a little self-hatred.
The Thief in the Night
If you end up defaulting on the loan, the lender will swoop in, repossess your car, and sell it for, $5,000. From that amount, they’ll recover the $1,250-plus you still owe, and if your state is one of the many whose title loans are governed by pawn laws, the remaining $3,750 of the proceeds will simply be the icing on the cake for the lender. You won’t see a dime, and you’ll still have to come up with some money for a new car.
Hey, listen. Title lenders don’t enjoy $3.6 billion in profits from $1.6 billion in loans every year by being nice and doing the right thing. Basically, you just drove your car off a $10,000 cliff.
But on the bright side, you really do look a lot healthier now. Walking everywhere has given you more energy and mental clarity, and you’ve lost the thirty pounds you gained from eating your loan stress. Thirty pounds lighter and a whole lot smarter, and maybe that’s worth the ten grand you ended up paying to get your now-repossessed car fixed so that you wouldn’t have to walk everywhere.
Oh, the irony.
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