Little emergencies can cause big problems when you live paycheck to paycheck, as 76 percent of Americans do.
Now, it would be purely un-American if the banking and lending industry didn’t capitalize on the desperation of people living in poverty, so the small dollar lenders all got together and said, “Hey! Why don’t we offer teeny tiny loans to people in exchange for having them give us their original car title? We can charge them exorbitant interest rates since we have them by the cojones, and if they end up unable to pay it, dang, girl, we’ll just repossess and sell their car and make even more money!” And so that’s what they did.
But if you live in Minnesota, you can rest assured you won’t get burned by these small dollar lenders, since title loans in Minnesota are about as easy to find as an oak tree in the Sahara Desert.
A Title Loan Is the Worst Type of Consumer Small Loan
Title loans are bad, bad news for most of the people who take them out. In most of the states where title loans are legal and unregulated, interest rates typically start around 300 percent a year and can soar higher than 550 percent. On the low end of that scale, a $1,000 loan will end up costing $1,250 at the end of the initial 30-day period. But most people who don’t have a thousand bucks lying around on the first of the month sure as heck don’t have $1,250 lying around at the end of the month, and thus begins the cycle of rolling over the loan to buy more time to scratch together the dough.
The average title loan customer rolls over the loan eight times, which means that at the end of the eighth month, when the loan is paid back in full, a $1,000 loan will end up costing $3,000. After a year, it’ll cost a total of $4,000.
Thirty states have banned title loans, and for good cause. In addition to outrageous interest rates, defaulting on a title loan means saying goodbye to your only means of transportation and, in most states that allow title loans, all of the equity you have in it. As in, all of the equity. Even if you owe the lender a paltry $50, they can keep every penny of the proceeds from the sale of your car at auction. If that doesn’t make you want to punch some walls, nothing will.
Minnesota Sticks It to the Predatory Lending Industry
Of the 20 states where title loans are legal, a handful of them has legislation in place that keeps the title loan slime in check. Minnesota is one of those states.
Minnesota keeps a tight rein on the consumer small loan industry. For small dollar loans of $350 or less, interest rates are capped on a sliding fee scale. For loans of $50 and under, the fee limit is $5.50. For loans between $50 and $100, lenders can charge no more than 10 percent interest for the 30-day period. For loans of $101 to $250, the cap is 7 percent, and for loans of $251 to $350, the interest rate is capped at 6 percent.
For loans over $350 and under $1,000, annual interest rates are capped at 33 percent. Unfortunately for title lenders, 33 percent APR is barely worth the ink in their cheap pens, and as a result, you won’t find many of these lenders doing business in Minnesota.
To make matters even worse for title lenders, Minnesota statutes require that anyone who holds a vehicle title as part of a pawn transaction must be licensed as a used car dealer, and if the borrower defaults and the car is repossessed, the lender has to store the car for 90 days before they’re allowed to sell it.
Leaving the Land o’ Lakes to Secure a Title Loan? Read This First!
Unfortunately for title lenders outside of Minnesota, which advertise heavily to turn a profit from Minnesota’s low-income population, Minnesota law makes it painfully clear that any out-of-state lenders are subject to these same rate caps when lending to Minnesota residents.
But remaining true to their predatory lending roots, these outside lenders usually do everything in their power to hide this fact from you and will go to great lengths to convince you that no, you definitely have to pay 450 percent interest on your online title loan, Minnesota legislation be damned. They may show you the contract you signed, where it says that the contract is governed by the laws of their state, not yours. But guess what? Under Minnesota law, a small-dollar loan contract – no matter what state the lender is in – cannot contain this “choice of law” provision.
But sadly, too many borrowers don’t know this, and they end up paying the equivalent of a years’ worth of their kid’s college tuition for the privilege of borrowing a couple hundred bucks so they can keep the lights on until Dad can find another low-paying job.
Advice from the MN Commerce Department
The MN Commerce Department has one tip for borrowers: exercise caution if you decide to borrow money with a car title loan. We all know that car title loans are expensive, not to mention being short-term.
Before you decide to sign a deal with a car title lender, make sure that the company is licensed. You can use the License Lookup tool on the Commerce Department’s website. These licensed lenders are under oath to observe the Minnesota consumer protection laws. So if you are aware of these governing laws, you’ll be able to ensure that your lender or leasing firm will follow the state’s limits on your interest and finance charges.
Don’t fall for unlicensed lenders that you can easily find by searching online, no matter how tempting their offer is. You may end up paying extra charges that are originally against the law.
Don’t be tempted to borrow more than what you need as well. Car title lenders will often offer the maximum limit that you can borrow. But no matter how much the offer is, just stick to how much you can afford to pay. In this way, you can avoid falling into their cycle of debt trap.
Always remember that you should always read AND UNDERSTAND your leasing agreement before you sign up. Some opportunists may use your immediate need for cash to mask unreasonable terms in your contract. So if you’re not careful, you might be legally bound by the law to pay for something you are not even aware of in the first place.
Last, but certainly not least, always try to exhaust every available option first and put car title loans as a last resort. There are many alternatives to car title loans if you just know where to find them.
Alternatives to Title Loans
Predatory lending has cost many a soul way more money than they can ever hope to pay back, and one out of every six borrowers loses the family car to these legal loan sharks. If you’re tempted to try to beat the odds and take out a title loan to cover emergency expenses, don’t do it until you’ve exhausted every other resource, including government assistance, churches and other charities, family members and friends, and even the good ol’ old-fashioned pawning of the Wii or the flat-screen TV. Because when it’s all said and done and you’re staring at your walls every evening wondering where you went wrong, at least you’ll still have your wheels.