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Can Federal Regulation Stop the Car Title Loan Debt Trap?

Updated on January 11, 2018
Image from Pixabay, CC0
Image from Pixabay, CC0

Many people who need cash right away and do not have good credit score believe that getting a car title loan is the answer. Having a valid driver’s license and a title to a car or other motorized vehicle is enough to get them the quick cash they need. However, there is a downside to getting this easy cash. According to Titlelo, a title loan company located in Fort Lauderdale, Florida, title loans are not for everyone. These often misused loans entrap borrowers into further debt.

A car title loan is a form of credit that is so expensive. Since it is a short-term, high-interest rate loan, you need to repay the full amount of the loan plus at least 25% interest per month or a triple-digit annual percentage rate (APR) typically in 15 to 30 days with.

If for example the loan amount is $500, you need to pay $625. If you don’t pay the full amount, the lender may agree that you pay only the $125 interest and the loan will rollover to the next month. If this keeps on, you have already fallen into a debt trap of repeat borrowing. Later you will realize that it’s impossible to repay the loan and the lender will repossess your car and you lose even more.

Hence, the best advice to follow is to keep yourself away from car title loans and similar type of loans like payday loans. But it seems that some people just have no way of getting access to emergency credit, so they take their chances with car title loans.

Federal Laws and State Laws In Relation to Car Title Loans

Most people thinking of getting a title loan already know about the basics of car title loans mentioned above. But, knowing the basics is not enough as it is further necessary to know the laws that regulate title loans.

As per the Federal Government, car title loans are legal unless explicitly banned by state laws. For years, that is the only guideline set by the Federal Government when it comes to title loans. But recently, title loans became a focus at the federal level. The U.S. Consumer Financial Protection Bureau (CFPB), the federal government’s consumer watchdog, is being tasked to regulate payday and car title loans. The purpose of the regulation is to stop the debt trap of repeat borrowing without cutting off people’s access to emergency credit.

Here are the new proposed rules to in relation to car title loans:

1. The lender must determine the borrower’s ability to pay. Before approving a loan of 45 days or less or with a balloon payment, lenders need to know if the borrower has the ability to repay the loan on its due date. Lenders can do this by verifying the borrower’s income and taking into account their expenses.

2. Loans under $500 are exempt from the ability-to-pay requirement when repayment is stretched over three installments.

3. The number of loans made in quick succession is limited to three. There’s a mandatory cooling-off period of 30 days before a borrower can apply for another loan.

4. When lenders of loans with over 36 percent interest have access to the borrower’s bank account, they are restricted from making multiple withdrawals. If there be two unsuccessful withdrawal attempts, the lender cannot make further withdrawals unless reauthorized by the borrower. This is to prevent too much overdraft fees.

Many consumer advocate groups, civil rights groups and church leaders are happy about the new federal regulation. They see it as a way to help end the cycle of debt that are entrapping poor consumers and families that can hardly make ends meet.

On the other hand, the lending industry criticizes the regulation and sees it as a threat to the survival of lenders. The Community Financial Services Association of America also said that millions of American consumers depend on small dollar loans to manage budget deficits and emergency expenses. A study by the Pew Charitable Trusts in March 2015 mentions about the 2 million Americans access car title loans annually. With the CFPB’s regulation, consumers will eventually be cut off from vital credit when they need it.

Aside from the federal rules, it is important to know the state laws applicable to title loans in your area. You should know that car title loans are banned in the following states: Alaska, Arkansas, Colorado, Connecticut, Florida, Hawaii, Indiana, Iowa, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Montana, Nebraska, New Jersey, New York, North Dakota, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Vermont, Washington, West Virginia and Wyoming. You should know if your state caps the interest rate or not. Here’s a table summarizing the U.S. states where car title loans are legal and the effective state laws on car title loans:

State
State Law
Alabama
Loan amount not regulated. Loan terms may not be less than 10 days
Arizona
Loan amount not regulated. Loan terms may not be less than six days, and the interest rate may not be higher than 17%
California
Consumers must borrow more than $2,500. Loan terms and APR caps differ depending on the amount borrowed, with the maximum APR being 30%.
Delaware
Loan amount not regulated. Loans cannot exceed 180 days, including roll-overs.
Georgia
Loan amount not regulated. Loan terms are also not regulated, but the interest amount cannot ever exceed 25%
Idaho
Loan amount not regulated. Loan terms may not be more than 30 days.
Illinois
Consumers may borrow up to $4,000, or up to 50% of their monthly income. Borrowers are only allowed one renewal per the state laws.
Louisiana
Consumers must borrow more than $350. Loan terms are generally around two months, and carry an APR of 36%
Mississippi
Borrowers may not be lent more than $2,500. Loan terms may not exceed one month unless the borrower plays at least 10% of the principle. Interest is capped at 25%.
Missouri
Borrowers may not be lent more than $5,000. There are no regulations regarding loan terms or interest rates.
Nevada
Loans may not exceed the market value of the vehicle. There are no regulations on loan terms or interest rates, but borrowers may only renew a loan six times.
New Hampshire
Borrowers may not be lent more than $10,000. The APR is capped at 25%, and borrowers are allowed up to 10 renewals.
New Mexico
Loans are capped at $2,500
South Carolina
Loans must be greater than $2,500.
South Dakota
Loan amount not regulated. Loan terms may not exceed 30 days, and borrowers are allowed up to four renewals
Tennessee
Loans cannot be in excess of $2,500. Costs and interest rates are regulated, with only one fifth of the total loan amount being allowed for total costs, and only 2% interest being allowed each month.
Texas
Loan amount not regulated. Loan terms may not exceed 180 days, and the interest rate is capped at 10%
Utah
Loan amount, terms and interest rates are not regulated
Virginia
Loans cannot exceed 50% of the fair market value of the car. Loan terms and interest rates are highly regulated and specific to each district within the state.
Wisconsin
Loans must be no more than 50% of the value of the car, or up to $25,000, whichever is less. Loan terms may not be more than six months.

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      mackyi 9 days ago

      Very informative. You have shed light on a few things I actually never thought of!