When you need money, often times the need is immediate. Finance companies sometimes offer an easy way out of financial problems by offering a car title loan. Unfortunately, clients are misled by the quick money that a car title loan offers.
Tagged as abusive, car title loans charge extremely high interest rates of up to 360%. To receive a car title loan, the consumer must sign over their car title as collateral. Set up as open-ended credit, car title loans are not subject to an interest rate limit or a maturity date.
So how does one get to have a car title loan? It’s simple. A customer enters the finance office to apply for a car title loan and is asked how much money they would like to borrow. With no credit check and no delay, the borrower can obtain a loan by exchanging their car title and an extra set of keys to their vehicle as collateral. The loans are typically less than $1,000.
The borrower then makes the first payment after 15 days and then every 30 days thereafter. The borrower pays one percent interest per day and must pay a minimum of ten percent of the loan principal with each payment, excluding the first payment.
Every car title loan has an annual percentage rate of up to 360%. While the car title loan can be paid off early with no penalty, the vehicle can be repossessed with one missed payment. Unfortunately, many borrowers are losing their transportation because of this.
This “Secured lending” is supposed to be cheaper for borrowers than unsecured lending because the lender can look to collateral in the event of default. That security means that it is a kind of lending that is in a vastly different category than payday loans and should not be compared to it.
The car title lenders have avoided interest rate limitations by structuring the debt as open-ended credit, like credit cards. Open-end credit was deregulated because federal law let out-of-state card issuers export their no-cap law. The legislature has never decided that secured, small loans should be deregulated.
Most secure title loans are charging a much higher interest rate than unsecured credit cards. Credit cards are unsecured, and therefore more risky than secured loans. Despite the greater risk, the current average interest rate charged by credit card companies is 12.5%. Yet car title loans that are secured by cars which are owned free and clear by the title loan borrowers, are being charged rates that are 29 times the rate being charged on credit cards.
Due to astronomical annual percentage rates and because of the high repossession rate, the first payment on these loans is due a scant 15 days after borrowing the money. Failure to make the first payment of your car title loan, or anyone payment thereafter results in repossession. While no data is currently available on repossessions of cars, at one auction house, over 150 vehicles have been sold after being repossessed.
There is also the loss of equity. For example, for many Iowans, their car is their most valuable asset. Car title loans put this asset at risk and Iowans are losing all of their equity to the astronomical interest rates. For the unfortunate clients who lose their car to repossession any excess equity, they may have built is eaten by the repossession costs and interest rate charges.
The “financial emergency” that necessitated the desperate car title loan for these consumers is rarely as short-lived as the loan terms, so the interest quickly mounts as paying the loan off with a balloon payment is commonly impossible. It will appear that in a car title loan, you won’t be able to escape at all.
Here are some guiding principles from an affordable loan term. These should keep you away from car title loans as well:
- Establish Fair and Affordable Loan Terms. Title-secured loans should be repayable in affordable installments rather than a lump sum. Is your car title loan like this? Rates should be limited, and lenders should be required to consider the borrower’s ability to repay
- Protect Borrowers After a Default. States should bar abusive practices such as seizing cars without notice, pocketing the difference between the sales price and what the borrower owes or pursuing the borrower for even more money after repossessing the car.
- Close Loopholes to Ensure Consistent Regulation. States that permit title lending should close loopholes that exempt some loans from the law and ensure that laws apply to all lenders, including those operating across state lines.
- Monitor Lenders Better. States should closely monitor lenders through strong licensing, bonding, reporting, and examination requirements.
- Ensure Borrowers Can Exercise Their Rights. Car title loan borrowers should be able to sue title lenders and void contracts that violate the law. Binding mandatory arbitration clauses that deny borrowers a fair chance to challenge abuses in court should be eradicated.