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Why Car Title Loans Are Illegal in Some States – Should They Be Illegal in All of Them?

Vehicle Title Loans

Car title loans are notorious for landing low-income individuals in a revolving cycle of excessive debt, causing great stress, and, for one out of every six borrowers, resulting in the loss of their only viable transportation to work or school.

If you don’t already know, car title loans are short-term, high-interest loans that anyone with a car in their name and a government-issued ID can take out. It doesn’t matter if you can’t afford to pay back the loan, since title loans require that you give the lender the original title to your car, which they can (and will) repossess and sell if you default on the loan.


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Interest So High You’ll Get Vertigo

The typical interest rate for car title loans is 25 percent a month. Don’t get the monthly interest rate confused with the annual percentage rate, or APR, which, in this case, is 300 percent. What that means is that if you borrow $1,000 and take a year to pay it off, you’ll end up paying back three times the amount of the principal, for a total cost of $4,000. If you have to take out a $1,000 car title loan in the first place, how will you be able to afford to pay back $4,000? The truth is, many can’t, and they wake up one morning to find their parking spot empty and all of their equity in the car gone, just like that.

States Where Title Loans are Illegal – And Why

Thirty states have outlawed car title loans because the cold, hard truth of the matter is that these loans ruin countless lives. Around 1.7 million people take out a car title loan each year, and 17 percent of them end up losing their vehicle. These loans prey on the poor, and the advertisements for them are often highly misleading.

States where title loans are illegal reason that title loans are designed to keep people in deep debt by require sky-high payments that few can afford. They posit that these loans pose a serious risk to the livelihoods of people who depend on their vehicle to get to work. Although title loans are marketed as 30-day loans, they rarely turn out that way, with the average borrower rolling over the loan eight times and ending up paying back more than 200 percent of the principal.

States Where Title Loans Are Legal – And Why

Sixteen states allow title lenders to operate virtually unregulated, with triple-digit APRs and unsavory practices that include allowing the lender to pocket 100 percent of the proceeds of the sale of a repossessed car, even if the balance on the loan is just a fraction of that amount. The states where title loans are legal are Alabama, Arizona, Delaware, Georgia, Idaho, Illinois, Texas, Mississippi, Missouri, Nevada, New Mexico, South Dakota, Tennessee, Utah, Virginia, and Wisconsin.

Four states allow title loans via a loophole in the law. In California, the interest rate is capped for loans up to $2,500, and so lenders typically require that loans be taken out for a minimum of $2,500. At the standard 300 percent APR, California title loan customers who take the average eight months to pay back the loan will end up forking over $5,000 in interest alone, plus the principal amount of $2,500 for a total of $7,500, which is often more than one-third of the borrower’s annual income. The same loophole allows title lenders in South Carolina to set the minimum loan amount at $600 to avoid pesky laws that cap the interest for lower amounts at 36 percent APR.

In Kansas, title loans are structured as open-ended lines of credit, since state law doesn’t cap interest rates for open-ended credit through qualified lenders. In Louisiana, title lenders offer a minimum loan amount of $350 with a two-month payback period to get around state laws that “restrict” predatory lending practices.

Should Title Loans Be Illegal In All States?

The Center for Responsible Lending, the Consumer Federation of America, and the Southern Poverty Law Center are three of the most outspoken critics of title loans. They believe that these over-secured, predatory loans are highly detrimental to the welfare of the people to whom they’re marketed. Almost 12 percent of title loan borrowers make under $15,000 a year, while about 18 percent make under $25,000. The average loan amount is $950, which equates to $2,140 in interest, plus additional fees every time the loan is rolled over.

These organizations want states where title loans are legal to take a serious look at the destruction these title loans leave in their wake and either ban them or regulate them in order to protect low-income consumers. Some of the restrictions they recommend include capping interest rates at 36 percent APR, limiting the amount of time a borrower can owe money to a title lender each year, and making small loans available and affordable for low-income consumers or those with poor credit.

But the lenders have a lot more pull in these states than the organizations trying to squelch their freedom to prey on poverty-stricken individuals who usually take out these loans in desperation to pay for a car repair, keep the utilities on, or cover another emergency for which the funds just aren’t available anywhere else. The 16 states where the loans are legal and allowed to charge astronomical interest rates absolutely do not want to restrict the freedoms of title lenders and the big banks that back them. Why? Because their profits of $3.6 billion for $1.6 billion in paid-out loans makes them very powerful, and we all know that too many of our legislators don’t like to step on powerful toes because, you know, liberty and freedom.

Lenders and some scholars argue that infringing on title lenders’ rights to screw poor people out of every ounce of financial security will force the lenders to close their doors, which will prevent people who need cash quickly from getting the financial help they need. But the “financial help they need” too often turns out to be the straw that breaks the camel’s back, setting these consumers back financially and even resulting in homelessness and other serious social problems.

State and Federal governments are more than happy to intervene with legislation to protect wealthy consumers, but they see no problem with leaving the poor to fend for themselves, usually with dire consequences. How does that make you feel? Do you think these predatory lenders should be reined in, or do you think that the unrestricted liberties of title lenders are more important than the freedoms of consumers to enjoy fair lending practices?