Title loans are small dollar, short-term loans that carry exorbitant interest rates and require your original car title as collateral. When you default on a title loan, as one in six borrowers will do, the lender repossesses your car and sells it to pay off the outstanding portion of the loan. Some states require that the surplus proceeds be returned to the borrower, but other states allow the lender to keep the surplus as well.
Title loans are considered by experts to be the worst type of predatory lending. Predatory lending is any lending practice that involves unfair loan terms or unscrupulous actions that lead to financial hardship for the borrower. Title loans fit this definition perfectly, despite the defensive caterwauling and self-righteous indignation of title lenders who are accused of highway robbery by a huge number of local, state, and Federal legislators, consumer advocacy groups, legal organizations, poverty relief associations, research foundations, economic development consultants, institutions of higher education, and other parties whose vast wealth of knowledge and extensive research concerning title loans can’t seem to sway knuckle-headed lawmakers in some states to regulate these loans.
Valuable Service or Legal Robbery?
Stories abound of catastrophic financial ruin at the hands of title loan providers, who defend their lending practices by pointing out that they offer a valuable service to people who need emergency funds but whose credit score or low income preclude them from getting loans through traditional means.
On the surface, that’s true. People with poor credit or a low income usually don’t qualify for bank loans, and emergencies do arise that require relatively small sums of money. The median loan amount is $845, which is small beans for people who make a decent living and have several hundred dollars left over each month after the bills are paid. But those aren’t the folks who are taking out title loans. Rather, it’s most often the people who live paycheck to paycheck and don’t get paid a decent living wage who patronize garish title loan storefronts, and for those folks, $845 may as well be several thousand dollars. And for many of them, an $845 loan is several thousand dollars by the time they’re able to pay it back. At the typical 300 percent annual percentage rate, or APR, and after rolling over the loan the typical eight times, at the end of the eighth month, the borrower who takes out an $845 title loan will have paid back a total of $2,535.
For most title loan customers, once the papers are signed and the cash is in hand, they’re financially sunk for the foreseeable future. Most borrowers can’t pay back the loan after the initial 30-day term, and things go downhill from there, and fast. And that’s exactly what title lenders are banking on, and it’s just one of the ways in which title lenders prey on the poor.
The Top Four Ways Title Lenders Prey On the Poor
Title lenders like to pretend they’re doing you a favor. They like to spout nonsense about how they’re helping people who have no other way to get funds to cover an emergency. And they like to deny that the deep debt they sink hardworking people into is usually far, far worse than the original emergency. Here are just four of the many ways in which title lenders prey on the poor.
- They lend money to people who can’t afford to pay it back.
As a rule, title lenders don’t run credit checks, and most don’t require proof of income. That’s because they don’t have to worry about losing money if you’re unable to pay back the loan, because they essentially own your car until the loan is paid off. If you default on the loan, the lender will just repossess your car and sell it to cover what you owe.
- They count on borrowers being unable to pay back the loan according to the original terms.
Not only do title lenders not require proof of your ability to pay back the loan, they actually bank on your inability to do so. The goal of title lenders is to keep you rolling over your loan for as long as possible, because that’s how they make an absolute killing. Say you take out a $1,000 title loan and pay it back after the initial 30-day term. You’ll end up paying back $1,250 at the end of the term, and the lender has made a tidy little $250 profit. But if you can’t pay it back, the lender will let you extend the loan’s principal for another month if you pay just the $250 interest. After rolling over the loan for four months, you’ve paid $1,000 in interest, but you still owe the $1,000 principal.
The average title loan customer rolls over the loan eight times, so for a $1,000 loan, the lender has made a whopping $2,000 in profit. And that’s the way, uh huh, uh huh, they like it, uh huh, uh huh.
- They encourage borrowers to take out more than they need.
Say your electricity gets shut off and you need $400 to get it back on. You decide to take out a title loan to cover it, and you’re approved for $1,000. It’s standard practice for the lender to try to talk you into taking the whole amount for which you’re approved. According to one lender who spilled his dirty tricks of the trade to researchers at the Southern Poverty Law Center, it’s not unusual for a lender to lay the entire amount of cash you’re approved for on the counter and tell you that you can walk out with all that money right now. Then, they’ll remove the amount that’s above what you’ve requested and tell you they can put it back in the safe if you don’t want it. That’s a powerful visual for someone who is hurting for money, and most people end up taking the whole amount, even though they most likely can’t even afford the initial amount.
- They charge astronomical interest rates.
A credit card with a 25 percent APR is considered extremely expensive. But when you compare that to the 300 percent APR of a title loan, a high-interest credit card sounds like a bloody good deal. Title lenders typically charge 300 to 360 percent annual interest, but many charge as much as 560 percent, which means that a $1,000 title loan that’s rolled over for 12 months will end up costing a total $5,600.
Despite a Federal law that requires that interest rates be expressed in terms of the APR, many lenders will only give you the monthly interest rate, which sounds much lower when expressed in those terms. When researchers at the University of New Mexico called a number of title lenders to ask about their annual percentage rate, most of them were unable to convert the monthly rate into the annual rate. (Hint: all you have to do is multiply the monthly rate by 12.)
Don’t Become Prey!
If an emergency comes up and you’re considering taking out a title loan to cover it, think long and hard about it. Chances are, unless you have several hundred dollars in expendable income every month and can definitely pay off the loan at the end of the initial 30-day term, you’re going to end up in deep debt to the title lender, and by the time it’s all said and done, you’ll have paid up to three times (or more) the initial amount of the loan.
Instead of taking out a title loan, see if you can borrow the money you need from a friend or relative. Check with your local credit union, which may have a small dollar, short-term loan program with reasonable interest rates and terms. Work with creditors to set up a payment plan, or look into government programs or non-profit organizations who may be able to offer financial assistance for certain emergencies.
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