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The Hidden Danger of Title Loans

Updated on October 31, 2013

What are Auto Title Loans?

On the periphery of the auto-lending world lurk lenders that prey on the desperate. Offering one of America’s fastest growing credit products, title lenders offer secured loans using unencumbered automobiles as collateral (McDonnel, 2012). These lenders claim that they provide borrowers with money to meet daily expenses, but in reality they charge exorbitant interest rates for a largely unregulated financial instrument. Title Loans are rarely, if ever, a good idea – but they are pitched at lower-income individuals who do not have access to financial planners or advocates.

According to a study in the Missouri Law Review, title loan companies charge upwards of 300% APR, making many times the value of the loan in as little as a year (Martin & Adams, 2012). Either the borrower scrapes together the money to make the enormous monthly payments, usually arranged as “interest only” payments to prolong the debt of the borrower, or the lender repossesses the vehicle which is usually valued at many times the loan’s initial principle. As an unregulated industry, title loan companies often use deceptive wording and predatory advertisement to bait borrowers into signing away their cars for pennies on the dollar.

Source

Who do Title Loans Target?

Title loans operate in the shadowy gray-market of the “fringe banking industry,” so called because of its mixture of illicit and legal tactics. Very few title loans originate in banks; they normally are marketed by pawn shops, check cashing facilities, and other businesses that prey on low earners. Micro-lending fills a niche in the working-class community, providing access to credit for people who would not qualify for regular loans, but title loans (and other fringe banking products) take advantage of the limited financial knowledge and dire circumstances of these people to turn out obscene profits on their misfortune.

Title Loan Interest Rates

State
Average Title Loan Interest
New Mexico
280% APR
Texas
190% APR
Washington
290% APR

Title Loan Poll

Have You Ever Used a Title Loan for Temporary Spending Money?

See results

One of the reasons that title loans are such a bad idea is the near impossibility of paying the loan off before it accrues massive interest. These loans are typically offered to people without steady incomes, so there is no reason to believe that the borrowers would be able to make anything other than a minimum payment for several payment cycles. Making the minimum payment, a $1,000 loan at 300% APR quickly becomes a $5,000 loan, rapidly becoming impossible for the borrower to pay off (Lusardi, 2012). The lender anticipates this eventual default, basing their lending decision off the eventual repossession of the car that the loan is secured by. Title loan lenders plan for their borrowers to default, and they stand to make the most money by stringing a borrower along for several payments first.

Title Loans Vs. Bad Credit Loans

One need not look long to find examples of individuals being screwed over by title loans and unscrupulous lenders. The practice of predatory lending has become so common in some states (specifically in the American Southwest) that the Attorney General’s office for the United States has created a task force to investigate previously unsupervised lending operations. Unfortunately, title lending has given a bad name to other parts of the auto-lending world, specifically bad-credit auto loans that originate from trustworthy sources. There are several lenders that offer secured purchase-loans for automobiles, completely different from title loans, but they are often lumped into consideration with title lenders who offer non-purchase loans that are secured by already paid-off cars (Eneix, 2013).

Works Cited

Eneix, K. (2013, July 31). Used Car Loans with Bad Credit. Retrieved October 10, 2013, from Complete Auto Loans: http://www.completeautoloans.com/used-car-loan-with-bad-credit/

Lusardi, A. (2012). Numeracy, Financial Literacy, and Financial Decision-making. National Bureau of Economic Research, No. w17821.

Martin, N., & Adams, O. (2012). Grand Theft Auto Loans: Repossession and Demographic Realities in Title Lending. Missouri Law Review, 1-41.

McDonnel, J. (2012). Secured Consumer Credit and the Fringe Banking Industry. Secured Transactions Under the UCC, 1.

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