Living paycheck to paycheck is a little scary, especially for the 25 percent of Americans who don’t have any money saved for an emergency. For these 79.9 million people, a bum fuel pump or a compacted wisdom tooth can cause major financial problems. And that’s why 1.7 million people turn to car title loans as a last resort. Unfortunately, while the tooth extraction or fuel pump replacement gets taken care of, one out of every six people who gets a title loan loses the family car to repossession.
Thirty states have outright banned car title loans, also known as title pawns and pink slip loans, because of the predatory practices and astronomical interest rates associated with small dollar, short-term loans. In some of the states in which title loans are legal, caps on the interest rate help protect consumers from financial ruin, although you won’t find many title lenders in states with low rate caps, because the lenders can’t make money hand over fist as they do in states without interest caps.
Car title loans in Delaware are legal, and while there is no limit on the interest lenders can charge, Delaware has a number of regulations in place to ease the borrower’s burden of deep indebtedness.
How Title Loans Work
Title loans are super easy to get. There are no credit checks, and in most cases, you don’t even have to prove that you have an income. All you need is a car with a lien-free title in your name and a valid government-issued ID.
So when your car needs a $600 repair and you have no savings and live paycheck to paycheck, you can take your original title and your vehicle to any of the hundreds of title lenders in Delaware, and they’ll give you anywhere from 25 to 40 percent of the value of your car. All you have to do is hand over the original title and a spare set of keys so that when you don’t pay off the loan according to the terms, the lender can repossess your car without having to spring for a tow truck.
Delaware Cares – Kinda
Under Delaware law, title lenders can charge whatever interest rate strikes their fancy. The typical interest rate on title loans is 25 percent a month, which equals a 300 percent APR, or annual percentage rate. To put that into perspective, people with mediocre credit who secure a mediocre credit card will likely pay around 25 percent APR, and that’s considered exorbitantly high. What 300 percent APR means is that if you borrow $1,000 and pay off the loan after one year, you’ll end up paying $3,000 in interest alone, plus the $1,000 principal. When it’s all said and done, you’ll pay back a total of $4,000. Some title lenders will charge as much as 550 percent APR, which is really just criminal. Except it’s not. It’s perfectly legal, even in Delaware.
But Delaware does have some regulations in place to rein in some of the more roguish behaviors title lenders like to engage in at the great expense of the overall wellbeing of other human beings. Because money, y’all!
First of all, before a borrower signs a title loan agreement, certain disclosures must be made by the lender, and these must be in a “conspicuous format.” If the disclosures aren’t made, the borrower can rescind the loan at any time up to one year from the final payment date on the original loan agreement and pay only the outstanding principal, and if the fees and interest paid have exceeded the unpaid proceeds of the loan, the lender will have to refund that to the borrower. The seven disclosures are as follows:
1. “The loan you are considering entering into is strictly for short-term cash, and is not a solution for long-term financial problems.”
2. “You, as borrower, are not compelled to complete the loan agreement merely because you have received any disclosures.”
3. “If you sign the title loan agreement, the title loan lender will obtain a security interest in your motor vehicle, and if you fail to meet the obligations of the title loan agreement, the lender can take possession of your motor vehicle and sell it.”
4. “If the lender takes possession of your motor vehicle, you may lose equity in that vehicle.”
5. “You have a right to rescind the title loan agreement for any reason, at no cost to you, at any time up to the end of the business day following the day in which the loan proceeds of the title loan were distributed to you by returning the full amount of the loan proceeds to the title lender.”
6. “You have the right to receive information about credit counseling services from the Office of the State Bank Commissioner.”
7. “You may file a complaint with the Office of the State Bank Commissioner if you believe your lender has violated any law regarding your title loan.”
The average title loan borrower rolls over the loan eight times, which means that’s how many times they tell the lender they can’t pay the loan off this month. The lender beams brightly (because this is where they make a massive killing on your misfortune) and says, “No problemo, buddy, just pay the interest this month and you can pay the loan off at the end of next month, along with another heaping helping of interest.” After rolling over a $1,000 title loan eight times, the total cost of the loan will end up at a staggering $3,000.
In Delaware, you can’t opt for a title loan rollover that would extend the repayment period beyond 180 days, or six months, from the date you received the money. So if you won’t be able to pay off your title loan by the end of six months, you’d best find another way to cover your emergency.
Here’s where Delaware really does you right. In many states where title loans are legal, lenders can repossess your vehicle pretty much whenevs. Two days late on your payment, and you can wake up to find your car gone. In Delaware, title loan lenders have to offer the borrower a workout agreement before repossessing the car. The workout agreement requires a net reduction of at least 10 percent each month on the outstanding portion of the loan.
The borrower has 10 business days to accept the agreement before the lender repossesses the car, buying the borrower some time to scrounge around for funds to pay off the loan. And according to the law, the workout agreement doesn’t equal default, and the lender can’t take the car unless the borrower defaults on the workout agreement.
Interest After Repossession
Once your car is repossessed, the lender has to stop charging interest on the loan. You’d kind of think this would go without saying, but many lenders will repossess your $10,000 car to cover the $1,000 principal you still owe after paying $1,500 in interest and KEEP CHARGING YOU INTEREST ON THE LOAN until the car is sold at auction. So slimy.
The Proceeds from the Sale of the Vehicle
Here’s another way in which Delaware’s got your back. Once the vehicle is sold, that’s the end of your title loan woes. Of course, now you have the walkin’ blues, but if you owe $1,000 and your vehicle sells for $700, the lender can’t come after you for the $300 balance. In some other states, the lender can keep charging interest on that $300 and sue your pants off to get it.
And even better is that in Delaware, the lender has to send you any extra money they get for the car. Again, in some other states, the lender can sell your car for $5,000 to cover a $1,000 balance and pocket the extra $4,000 for their trouble.
Once the car is sold, the lender has to send you a written explanation of what they did with the proceeds of your vehicle’s sale and let you know whether or not there was a deficit or surplus of funds. The explanation has to be accompanied by a notice that the sale has satisfied all of the outstanding proceeds of the title loan.
Still, Title Loans Are Bad News
Listen. Unless you’re going to die or end up sleeping in a cardboard box downtown if you don’t come up with funds you don’t have, stay far away from title lenders. Look into other resources for money or see if your debtor can work out a payment plan. You might even consider pawning your prized flat-screen TV or gaming system in lieu of taking out a title loan. Nearly any (legal) means of getting money is going to be better than risking losing your only mode of transportation and paying three times the amount of the loan in interest by the time it’s all said and done.
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