Title loans are risky business. Well, they’re risky for the borrower, anyway. For the lender, they’re about as safe a loan as anyone could offer. That’s because a title loan is secured by the borrower’s vehicle’s title, which means that borrowers who default on a title loan will have their car repossessed by the lender, who will sell it to cover the unpaid portion of the loan.
Title loans are the worst kind of predatory loan, which is any loan that puts unfair terms on a borrower. The unfair terms of a title loan include exorbitant interest rates of 300 percent or more annually and the fact that they’re grossly over-secured, which means that the collateral (your car) is worth far more than the loan you get. Most title lenders offer between 25 and 40 percent of the value of a vehicle, and that’s largely because if you default on a title loan, you’ll often owe twice as much as what you originally borrowed, due to the astronomical interest rates.
Despite being illegal in 30 states, title loans provide lenders with $3.6 billion in profit each year on $1.6 billion worth of paid out loans, which represents about 1.7 million loans every year. One in six borrowers loses the family car to repossession when the loan goes into default. Of the 20 states where title loans are legal, over half have refused to regulate them despite pressure from a number of consumer advocacy groups and other organizations.
Title Loans in Arizona: Half-Hearted Regulation is Better than No Regulation
Arizona is one of the nine states that have enforced a cap on title loan interest rates, but Arizona’s cap of 17 percent a month on loans under $500 still leaves a lot to be desired. Whereas most states that impose a rate cap choose one that protects consumers from extreme hardship in paying back the loan, Arizona’s rate cap only slightly lessens the hardship but ensures that title lenders are still able to make more than their fair share of profit on these loans.
Here’s the thing about interest rates on title loans. Title lenders claim that they have to charge these exorbitant rates because since they don’t run credit checks and often don’t even require proof of income, they have to protect their ass(ets) somehow.
But the whole point of a title loan is that the lender essentially owns the vehicle until the loan is paid back. That’s their protection, and that’s why they’re called “title” loans.
The real reasons they charge such high interest are so that a) they can make a sheesh-ton of money and b) they can keep customers rolling over the title loan for months on end, ensuring that the killing they make is massive. One title lender ‘fessed up to the Southern Poverty Law Center concerning high interest rates: “To be honest, it’s an entrapment – it’s to trap you.” He estimated that 98 percent of his title loan customers roll over their loan, and indeed, research shows that the average title loan customer will roll over the principal eight times before either paying off the loan or getting their car repossessed.
In states where pesky rate caps don’t limit the amount of money a title lender can make off of the misfortune of others, the typical 25 percent monthly interest rate means that after rolling over a $500 loan the typical eight times, that small dollar loan will end up costing a rather large $1,500. Arizona’s rate cap of 17 percent a month is only slightly better. After eight months in Arizona, that same $500 loan will end up costing $1,180. For bigger loans, Arizona’s cap is considerably lower than those of unregulated states, but still high enough to ensure loan customers will have a hard time paying off the loan at the end of the initial 30-day term. The monthly interest rates on loans between $500 and $2,500 is capped at 15 percent, and anything over $5,000 is capped at 10 percent. After eight months, a $3,000 loan will end up costing $6,600 ($450 a month in interest alone,) and a $5,000 loan will end up costing $9,000 ($500 a month in interest alone.)
Reposession in Arizona
If an Arizona title loan provider is going to repossess your car after you default on your title loan, they have to have a court order to do it. They don’t have to warn you before they send the repo man your way, so if you default on a title loan in Arizona, you should probably make sure you don’t leave any personal possessions in your car.
Once the car is repossessed, it has to be sold in “commercially reasonable manner,” either through a public auction or a private sale. The proceeds of the sale will go toward paying off the outstanding loan balance plus any expenses incurred for repossessing, storing, and selling the vehicle. By Arizona law, the surplus of the proceeds must be returned to the borrower, along with a written account of the disbursement of the proceeds. If the sale of the car isn’t enough to cover what’s due, the lender can sue the borrower for the remaining balance.
Alternatives to Title Loans
The best way to protect yourself from a title loan in Arizona is to avoid taking one out. When an emergency arises and you need cash fast, a title loan may seem like a godsend, but in most cases, you’ll end up paying back more than twice or even three times the amount you borrowed, leading to serious financial problems that can plague you for months and months.
Instead, look into other options. Borrow money from friends or family members. Work out a payment plan with your debtors. Look into government agencies and nonprofit groups that offer financial assistance for getting utilities turned back on. Check with your local credit union to see if you might qualify for a small, short-term loan – you might be surprised! Only proceed with a title loan if it’s the absolute last resort and not doing so will cause extreme problems in your life. And in that case, work out a budget that will help ensure that you can pay off the title loan by the end of the initial 30-day term.
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