Sometimes desperate times call for desperate measures. But times must be desperate indeed if you have to pay triple-digit interest rates for a small, short-term loan, particularly when it means risking the loss of your car.

Unfortunately, a growing number of Americans who find themselves in a financial bind are turning to car title loans, a source for quick money that could end up costing them their vehicle, often the most valuable thing they own.

Title loans are marketed as small emergency loans, with the customer handing over his or her car title and an extra set of keys as collateral. A typical car title loan has a triple-digit annual interest rate, requires payment within one month and is for much less than the value of the car.

“Title loans trap borrowers in perpetual debt through unaffordable balloon payments, high interest costs and the threat of repossession,” says Jean Ann Fox, director of consumer protection at the Consumer Federation of America.

Car title lenders generally require prospective borrowers to have free and clear title to the car before giving a loan. The lender then decides how much the consumer can borrow, based on the vehicle’s value. The loan-to-value ratio is rarely greater than 33 percent, making it a win-win situation for the lender if the borrower defaults.

Title loans usually carry an interest rate of about 25 percent for 30 days. And, if you can’t pay off the loan at the end of 30 days, it will roll over with the same interest rate. That works out to about 300 percent annually. A $500 loan on the first of the month turns into a $625 debt at the end of the month.

The possible loss of your car makes these loans dangerous. “If you lose your car, everything else just cascades,” says John Ruoff, director for South Carolina Fair Share, a Columbia-based nonprofit organization. “You can’t access your job or health care and, therefore, you fall behind on other bills, and it makes life almost impossible.”

Lending and the laws

Car title lending was introduced in the early 1990s as an alternative to payday loans and has been growing rapidly, according to a study by the Center for Responsible Spending and the Consumer Federation of America. The recently released study indicates that, while some states have started to pass laws protecting borrowers from predatory lending practices by placing restrictions on repossessions and capping interest rates, many states have no title lending laws.

Only 14 states have pending title lending legislation. The lack of laws and restrictions surrounding title loans has made it difficult to count just how much money these loan companies make and how many people are caught in that circle of debt.

It’s estimated that there are currently more than 15,000 title loan shops in the United States.

In some states, such as South Carolina, lenders can only flip a title loan six times. In other states, there are no laws that require the lender to reimburse the borrower for a car sold for more than what is owed on the original loan.

“We feel that if states allow this type of lending then they need to regulate it much better,” says Amy Quester, policy and litigation counsel for the Center for Responsible Lending. “There is a lot of variety from state to state regarding title lending. However, I think title lenders have been operating below the radar and lobbying for special treatment and exploited loopholes.”

Ruoff agrees that title lenders have figured out how to be effective in the legislative arena. “They hire good lobbyists and make considerable campaign contributions.”

The credit industry has a very strong lobby everywhere, and most consumer advocates say it will be tough to get something accomplished unless more politicians are involved.

With no laws in place, you will find uncapped interest rates, some as high as 1200 percent. Lynn Drysdale, consumer law attorney for Jacksonville Area Legal Aid Inc., says title lending was the biggest daily legal problem facing her clients in the early 1990s when both title and payday businesses were popping up outside of local military bases.

“It’s been obvious and still is that these lenders target low-income areas,” she says. “They prey on the financially unsophisticated who generally already have financial problems.”

Fox says that title lenders make loans with little regard to their borrowers’ ability to repay.

“They purposely target borrowers who cannot afford the high-cost, short-term balloon loans, virtually guaranteeing that many of the loans will fail,” she says. “These types of loans are an indication that many people have a hard time making ends meet or have trouble with credit.”

The lenders’ side

Rod Aycox, president of Title Loans of America, defends the practices in his 200 stores across the nation. “They work for me, and they work for the customer. Against any bank product, payday or traditional consumer finance product, I think it’s a good value for what it’s worth.”

Aycox has been in the title lending business for 15 years and says he does more than 50 percent of the business in the country. He says that most of his customers are hard-working Americans from two-income households. He says that he provides a valuable service to consumers who are bad risks for conventional credit.

Aycox says that he is not a predator lender and that most of his clients pay back the loan in full and on time.

Fox views Aycox’s practices as bait and switch. Consumer lawyers and advocates see Aycox as a predatory lender who seduces people into believing that title lending is a harmless loan that they’ve used successfully before and can use successfully again.

“There is no light at the end of the tunnel,” says Fox. “How is it possible that if you don’t have $1,000 today, that you will have $1,250 30 days from now?

“These lenders are out to make money off desperate, financially downtrodden people. They are not operating fairly and are sucking the wealth out of vulnerable communities across the country.”

Ruoff agrees. “It is difficult for me to imagine that a loan where you pay 300 percent is a good loan, particularly when you are putting up an asset so significant as your car.”

Ruoff says that many people look at title lending as a business that lends money to high-risk people who could not get a loan otherwise. “Folks view it as one more businessman trying to make a living.”

However, Ruoff says of the borrowers, “They are operating on false hopes. No doubt that they are all bad credit risks and live in communities where credit is not as freely available from mainstream lenders. You don’t find banks in the same strip malls where you find title lenders. Part of it is a question of education, and part of it is a bad history from banks and credit unions and those places do not have the best reputation.”

Legislation

It’s doubtful you’ll see national legislation on these issues. “It’s much more likely that each state will have to make individual legislation,” says Ruoff.

Fox says the latest study, released on Nov. 17 by the Consumer Federation of America, found that out of 11 states that allow title lending, almost half are vulnerable to predatory lending, either through weak authorizing laws or failure to close consumer-loan loopholes.

Fox says, “Although states are trying to implement laws and regulations on title loans, many of the bills have been shot down or vetoed, thus continuing the cycle of debt for millions of Americans.”

Consumer groups would welcome title loan restrictions that require longer loan terms and provide borrowers affordable installment repayment schedules rather than paying back one lump sum so soon after the loan is made. Another proposed restriction would limit interest rates and require lenders to judge each customer’s ability to repay before making the loan.

Advocates would also like to see more responsibility taken by states, by providing borrowers with protections in the event of default. And they lobby for borrowers’ post-repossession rights.

Fox says the loan repayment schedule should allow the borrower to pay back the principal and accrued interest over a reasonable period of time, rather than requiring one massive lump sum payment shortly after the loan is made.

Jessica Dvorak, deputy administrator of the Iowa Consumer Credit Code points out that the idea of triple-digit rates on secured loans is ridiculous.

“The aspect of these transactions that make it look like a pawn or open-end credit over a reasonable period of time is just part of the debt trap,” she says.

Title lending shops opened their doors in Iowa in June of 2004. The Iowa Attorney General’s Office started receiving complaints just one month later. Dvorak says she feels that people going to these title lending shops don’t understand what they are getting into.

“They are not given the complete truth about the interest on loans or when the loans start incurring interest and that if the loan is not paid on time, their cars will be taken away.”

Dvorak says that legislation has been put in place that will start to regulate title lending in the state..

Loan alternatives

On face value alone, a title loan might seem attractive, especially if you need cash right away or have a problem getting a loan from a traditional lender such as a bank, credit union or savings and loan.

Critics stress that there are alternatives to title loans that offer much better rates without the high risk of car repossession.

“It’s important that people understand that title lenders are not the only option for borrowers facing the need for additional cash,” says Fox.

Alternatives to such loans include, but are not limited to:

“Education is obviously very important, and we have found that borrowers are being deceived by the false hopes title lending companies advertise,” says Drysdale.

“It’s intellectually dishonest for title lenders to say that these loans are an oasis for an emergency situation. The only thing it does is put the emergency off for a month and ends up putting those people in a deeper hole that leaves many without transportation.”

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