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.