Car title loans are short-term emergency loans that use the borrower’s vehicle for
collateral. They are very similar to payday loans therefore some of the information
presented in this report will be related to payday loans as they deal with the same issues.
At the beginning of the 1990s, payday loans were originated primarily by smaller
independent check cashing outlets and pawnshops, which offered other services related to
check cashing. By the mid-1990s, the industry had segmented to include large regional or
national multi-service providers of payday loans and large regional or national monoline
payday loan entities. (7)It is a short-term loan, usually no longer than 30 days. Your car
title is used to secure the loan. This means if the loan is not repaid, the lender may take
the car and sell it to get the loan money back. Most title lenders will only make the loan if
you do not owe anything else on the car. (1) According to California Department of
Financial Institutions, car title loans and auto title loans are designed for consumers who
need to borrow money only for a short length of time, generally around two weeks. (3)
Storefront and online lenders advance a few hundred to a few thousand dollars based on
the titles to paid-for vehicles. Loans are usually for a fraction of the vehicle’s value and
must be repaid in a single payment at the end of the month. (5).
Auto Title Lenders often target people with bad credit, low-income individuals,
military members, and elderly people.(1) A few state regulators provide information on
title loan borrowers. Missouri’s Auditor reported that 70 percent of payday and title loan
customers earned less than $25,000 per year. Illinois title loan users had average salaries
of less than $20,000 according to a Department of Financial Institutions study in 1999.
New Mexico regulators report that the average income of title loan borrowers, as reported
by licensees for 2004, was $21,818.(6) The military and Congress is making an effort to
keep soldiers from falling into this debt trap. Congress has ruled that offering payday and
auto title loans to service members on active duty, or to their dependents, will be illegal
no later than October 1st, 2007. (6) The law says, among other things, that it will be
illegal to loan money to service members on active duty or their legal dependents by:
using a check or other method of access to a financial account maintained by the
borrower, or the title of a vehicle, as security for the debt; allowing the borrower to roll
over a previous loan; requiring the borrower to waive any right to legal recourse,
including the Service members Civil Relief Act; requiring that the borrower establish an
allotment as a condition of the loan. (6)
When a person is facing financial problems, a short-term Auto Title Loan seems
like a good option, especially to someone with credit problems. However, the solution is
short term and the effects can be devastating. You can end up paying very high interest
rates and lots of money or lose your car. (1) Most car title loans have an interest rate of
25% for the first month. However, if you compound the interest annually the rate goes
up to 300 percent. Auto Title Lenders will usually write a loan for 30 days or less. At the
end of the month, the lender will accept the interest payment and allow the debt to be
“rolled over” for another month. On a $600 loan, the interest would be approximately
$150. This means you owe $750. If you only pay $150 for the month, you will owe $750
the next month. (1)
Loans are made without consideration of ability to repay, resulting in many loans
being renewed month after month to avoid repossession. Like payday loans, title loans
charge triple digit interest rates, threaten a valuable asset, and trap borrowers in a cycle of
debt.(5)The Consumer Federation of America prepared a report to learn more about title
lending and consumer protections in a variety of states. The survey findings were as
follows:
• Title loans are extremely expensive. Title loan stores charge a median 25
percent per month finance charge, which translates to 300 percent annual interest,
plus additional fees averaging $25 per loan. Online title lenders quote rates of 24
to 651.79 percent APR for loans fully secured by the title to the borrower’s paid for
car, but the low rate is charged by a lender that charges high fees for
additional products.
• Title loans trap borrowers in perpetual debt. Lenders don’t run credit checks
or base loans on the borrower’s ability to repay. Loans are generally due in one
month, with interest only renewals available. Since most lenders hold a duplicate
set of car keys, non-judicial repossession is easy.
• Title lenders structure their loans to evade state usury or small loan rate
caps. In California and South Carolina, loans start at dollar amounts just above
the cut-off for small loan rate caps. In Virginia, Iowa and Kansas, title loans are
claimed to be open-ended credit to benefit from the deregulation of credit cards in
those states. Title lenders making loans via the Internet export high cost loans to
consumers in protected states by using dubious choice of law claims from states
with no rate caps.
• Title loans are over-secured. Title lenders loan a fraction of the value of the car
used to secure the loan, with the most frequent loan-to-value set at 50 to 55
percent of the car’s value, a higher percentage than we expected. In Virginia,
many title lenders will loan up to 100 percent of the value of the car.
• Information necessary to make an informed credit decision is hard to come
by. Only four title loan websites disclosed an annual percentage rate prior to
applications being submitted. Store personnel often quoted monthly finance
charges as an interest rate instead of the federally required annual percentage rate.
Store clerks gave confusing and contradictory cost information. Consumers were
only able to obtain reliable pre-loan information in states that require licensees to
post rates and fees or to provide brochures on consumer rights.
• Rate regulation is necessary to reduce the price of loans. Store surveys found
the lowest rates in Arizona, where rates are capped at no more than 17 percent per
month on loans up to $500, and at lower levels for larger loans. In states with
high rate caps, title lenders with few exceptions charged the legal maximum.
Rates were highest in states with no rate caps, such as Illinois, where the
annualized rates ranged from 300 to 470 percent or New Hampshire where title
loans cost 300 to 366.9 percent.
• Permissive state laws and lender exploitation of loopholes and gaps in
protections leave vulnerable consumers exposed to high risk title loans. Title
lending passes for pawn transactions in Georgia and Alabama as a result of court
decisions that have not led to corrective state laws. Almost half the states permit
predatory title lending, either through weak authorizing laws or failure to close
loopholes.
• State laws set the stage for title loan debt traps by setting high maximum loan
ceilings and permitting one-month balloon payments. For example, Tennessee
and Mississippi permit loans as large as $2,500 to be due in 30 days. New
Hampshire caps its title loans at $10,000 with no rate cap and permits 11 loan
renewals with only five percent reductions in the original principle each time,
resulting in a balloon payment at the end. Georgia sets a 30 day loan but fails to
limit loan size.
• Internet title loans may deprive consumers of home state law protections.
Some online lenders claim choice of law contract terms from states, such as New
Mexico and Delaware, with lax credit laws. Consumers who live in states with
protective credit and pawn laws are exposed to online title loan abuses.
Many people have had bad experiences with these predatory loans.
• Gregory Dotson, a Tennessee sanitation worker, took out a $200 loan from
Golden Title Loans secured by his 1989 Chrysler New Yorker in order to make a
down payment on a house. Mr. Dotson paid $329 over seven months and then
lost the car to Golden Title Loans.
• Amparo Lopez borrowed $1,500 from a title lender in New Mexico in August
2003, using her 1996 Chevrolet Tahoe as security. By January 2005, she had paid
$5,000 in interest – over three times the amount borrowed – and still owed the full
$1,500.
• Felicia Scrubb, a 26-year-old single mother, obtained a $450 loan from Atlanta
Title Loans in July 2004 to pay rent and utilities. Each month, she had to pay
$112.50 in interest on the loan. When she was unable to pay the full interest
amount in November 2004, her car was repossessed in the middle of the night.
Without her own vehicle, she was unable to make it to work. Ms. Scrubb finally
got her car back in January, but not until a reporter from the Atlanta Journal-
Constitution contacted the title lender.(12)
The only supporters of this type of loan are the title pawn industry, their
employees, and the lobbyists that support them. Proponents of companies that provide
auto title loans insist that the companies are providing a necessary service and taking on a
risk that no other lender will take on. They assert that if they did not provide these loans,
substantial numbers of people will be unable to obtain a loan. They also assert that the
high interest rate is the only way they can afford to take the risk. These lenders claim
they are the only option for debt-strapped consumers. (8) Machado is the owner of Auto
Cash, one of three car-title loan companies in Tucson. Like others in the "fringe banking"
business, he thinks of himself as filling a desperate need in the economy. "You've got to
walk in their shoes," he says of his customers who, according to him, represent all
segments of society: "We have attorneys, firemen, police officers, professional people,
real estate brokers and real estate salesmen. They are not people who don't have
anything."(4)
There are many opponents of car-title loans both on the national and state level.
The Consumer Federation of America (CFA) is an advocacy, research, education, and
service organization. As an advocacy group, it works to advance pro-consumer policy on
a variety of issues before Congress, the White House, federal and state regulatory
agencies, state legislatures, and the courts. Its staff works with public officials to promote
beneficial policies, to oppose harmful policies, and to ensure a balanced debate on
important issues in which consumers have a stake. (10) The Center for Responsible
Lending (CRL) is a non profit, nonpartisan organization focused on policy research
and advocacy to stop predatory lending practices. CRL is an affiliate of Self-Help, one of
the nation's largest nonprofit community development lenders, whose mission is to create
and protect homeownership opportunities for low-wealth families
through home and small business ownership.(9) The National Consumer Law Center
(NCLC) is the nation’s consumer law expert, helping consumers, their advocates, and
public policy makers use powerful and complex consumer laws on behalf of low-income
and vulnerable Americans seeking economic justice.(11)
Critics of payday loans counter that the loans are usurious and that payday lenders
target vulnerable consumers, namely lower-income persons, welfare-to-work females,
military personnel, college students, and senior citizens living on fixed incomes. Critics
also argue that most payday loan borrowers do not use payday loans as an occasional
short-term emergency credit source. Rather, they contend that most borrowers become
very frequent users and, in turn, become mired in an ongoing cycle of high-cost debt.
Additionally, anecdotes offered by several consumer advocates cite instances of
continuous rollovers of payday loans, payday loan customers having multiple payday
loans outstanding simultaneously, and abusive collection practices on the part of payday
lenders. The inclusion of mandatory arbitration clauses within payday loan contracts
appears to be standard operating procedure among payday lenders and banks that partner
with payday lenders to originate payday loans. More often than not, these clauses work to
the benefit of creditors and to the detriment of borrowers. Finally, critics also argue that
increased regulatory oversight of the payday loan industry is needed.(7)
South Carolina Appleseed Legal Justice Center. (n.d.). Auto Title Loans
and the Law. Retrieved October 31, 2006, from
http://www.scjustice.org/pdfs/TitleLoans.pdf
Center for Responsible Lending. (n.d). Car Title Loans Overview. Retrieved October 31,
2006, from http://www.responsiblelending.org/issues/cartitle/
Car Title Loans-Auto Title Loans-Information for Consumers. (n.d.). Retrieved October
31, 2006 from http://chinese-school.netfirms.com/resources-car-title-loans.html
Bruner, R. (2002). Driven to Debt. Tucson Weekly. Retrieved October 31, 2006, from
http://www.tucsonweekly.com/gbase/currents/Content?oid=oid:44872
Consumer Federation of America. (2005, November). CFA Car Title Loan Store and
Online Survey. Retrieved October 31, 2006, from
http://www.consumerfed.org/pdfs/Car_Title_Loan_Report_111705.pdf
BBB Navy Line. (n.d.). Congress Outlaws Payday and Auto Title Loans to Military on
Active Duty and Their Dependents; Caps Other Loans at 36% APR. Retrieved October
31, 2006, from www.navy.bbb.org/outlaws.doc
Federal Reserve Bank of Philadelphia. (2002). No Cash 'til Payday: The Payday Lending
Industry. Retrieved October 31, 2006, from
http://www.phil.frb.org/src/srcinsights/srcinsights/q1cc1.html
Supreme Court of Wisconsin. Case No.: 2003AP2457. Retrieved October 31, 2006, from
http://www.wicourts.gov/sc/opinion/DisplayDocument.html?content=html&seqNo=2528
7
Plunkett, T., Saunders, M. & Mierzwinski, E. 2006, March 1). The Consumer Impact of
Regulatory Relief Proposals Affecting Banks, Thrifts and Credit Unions. Testimony
presented before the Senate Committee on Banking, Housing, and Public Affairs.
Retrieved October 31, 2006, from
http://www.consumerfed.org/pdfs/Regulatory_Relief_ILCs_Senate_Testimony031506.pd
f
http://www.consumerfed.org/about.cfm
http://www.consumerlaw.org/about/
http://www.responsiblelending.org/pdfs/Letter-LouisianaTitleLoanBills060606.pdf