Title loans are small dollar, short-term loans that carry exorbitant interest rates and require your original car title as collateral. When you default on a title loan, as one in six borrowers will do, the lender repossesses your car and sells it to pay off the outstanding portion of the loan. Some states require that the surplus proceeds be returned to the borrower, but other states allow the lender to keep the surplus as well.
Title loans are considered by experts to be the worst type of predatory lending. Predatory lending is any lending practice that involves unfair loan terms or unscrupulous actions that lead to financial hardship for the borrower. Title loans fit this definition perfectly, despite the defensive caterwauling and self-righteous indignation of title lenders who are accused of highway robbery by a huge number of local, state, and Federal legislators, consumer advocacy groups, legal organizations, poverty relief associations, research foundations, economic development consultants, institutions of higher education, and other parties whose vast wealth of knowledge and extensive research concerning title loans can’t seem to sway knuckle-headed lawmakers in some states to regulate these loans.
Stories abound of catastrophic financial ruin at the hands of title loan providers, who defend their lending practices by pointing out that they offer a valuable service to people who need emergency funds but whose credit score or low income preclude them from getting loans through traditional means.
On the surface, that’s true. People with poor credit or a low income usually don’t qualify for bank loans, and emergencies do arise that require relatively small sums of money. The median loan amount is $845, which is small beans for people who make a decent living and have several hundred dollars left over each month after the bills are paid.
But those aren’t the folks who are taking out title loans. Rather, it’s most often the people who live paycheck to paycheck and don’t get paid a decent living wage who patronize garish title loan storefronts, and for those folks, $845 may as well be several thousand dollars.
And for many of them, an $845 loan is several thousand dollars by the time they’re able to pay it back. At the typical 300 percent annual percentage rate, or APR, and after rolling over the loan the typical eight times, at the end of the eighth month, the borrower who takes out an $845 title loan will have paid back a total of $2,535.
For most title loan customers, once the papers are signed and the cash is in hand, they’re financially sunk for the foreseeable future. Most borrowers can’t pay back the loan after the initial 30-day term, and things go downhill from there, and fast.
And that’s exactly what title lenders are banking on, and it’s just one of the ways in which title lenders prey on the poor.
The Top Four Ways Title Lenders Prey On the Poor
Title lenders like to pretend they’re doing you a favor. They like to spout nonsense about how they’re helping people who have no other way to get funds to cover an emergency. And they like to deny that the deep debt they sink hardworking people into is usually far, far worse than the original emergency. Here are just four of the many ways in which title lenders prey on the poor.
- They lend money to people who can’t afford to pay it back.
As a rule, title lenders don’t run credit checks, and most don’t require proof of income. That’s because they don’t have to worry about losing money if you’re unable to pay back the loan, because they essentially own your car until the loan is paid off. If you default on the loan, the lender will just repossess your car and sell it to cover what you owe.