Car Title Loans

A car title loan is a loan in which a car’s title and sometimes a copy of the keys are held as collateral.  Car title lenders may look or feel like a pawnbroker or a used car dealer.

Like payday loans, car title loans are marketed as small emergency loans, but in reality they are designed to trap borrowers in a cycle of debt. They put at high risk an asset that is essential to the well-being of working families:  their cars.

In July of 2010, a new law was passed which will create a Consumer Financial Protection Bureau (CFPB) to oversee consumer lending.  This means that for the first time, a federal agency will have the authority to rein in car title loans.  The agency is likely to be created during the summer of 2011.

Car Title Loan Facts and Stats

• The typical car title loan has an annual interest rate of 300% or more.
• In Oregon, 19% of title loans that were paid off in May 2002 had been renewed six times prior to payoff.
• The Missouri Auditor found that, on average, car title lenders make 3.5 times more renewal loans than new loans each month.
• Over half of the states ban high-priced car title lending, but in states where it is legal the industry is growing at an alarming rate.

How Car Title Loans Work

A lender will lend a borrower an amount no higher than 30 – 50% of the value of the car, meaning that most car title loans are “oversecured.”  The borrower has to repay the entire amount of the loan plus fees in one lump sum (a “balloon payment”), usually within a month.  If the consumer can’t repay when the loan is due, he or she can either pay another fee to roll the loan over, or the lender will come and take the car, sell it, and keep the money from the sale.

Car Title Loans Abuses

• Rollovers:  Often, borrowers cannot pay the full amount they owe on the due date so they must extend or roll over the loan repeatedly by paying another fee.  After rolling over the loan many times and paying many fees, consumers can end up paying more in fees than the amount they originally borrowed.
• Extremely high interest rates:  The fees charged for car title loans translate to interest rates (Annual Percentage Rates, or APRs) of 300% or more.
• Surprise!  The lender took your car:  Car title lenders can take the car from the consumer at any given moment if the borrower does not pay the loan back on time.  A borrower may walk outside one day and find the car gone.  This can lead to further financial and other problems, since most people depend on their cars to get to work, the doctor’s office, school, and so on.
• Losing equity:  If the lender takes the car, he or she will sell the car and may keep the full amount from the sale, not just the amount the borrower owes. Since, as we noted earlier, the amount of the loan is generally only 30% – 50% of the value of the car, this amounts to theft of the “equity” which the borrower had in his or her car.

State Regulation of Car Title Lending

In 2011, a federal regulator will be created with jurisdiction over car title loans.  Meanwhile, it is up to the states to regulate them.  High-priced title loans are illegal in more than half of the states.

In victories for consumers in 2008, New Hampshire capped car title loans at 36% APR, and Iowa closed loopholes to cap car title loan rates at 35% or less.  Oregon has also lowered the maximum allowable cost of a car title loan.  In 2007 lenders were banned from making car title loans or any other loans with APRs greater than 36% to members of the military and their families.

On the other hand, car title lenders are generous campaign contributors, and industry-friendly laws have been adopted  in some states.  Car title lending companies have grown rapidly over the last several years in states that do not protect consumers.  For example, there are over 900 storefronts in Alabama, over 272 in Mississippi, over 230 in Missouri, 150 in Virginia, and  111 in just one county in Tennessee.

Even worse, in states where car title lending is illegal, title lenders have sought to hide the true nature of their products in order to exploit loopholes in existing laws – pretending, for example, that their abusive loans are “sales and leasebacks,” “pawns,” or “motor vehicle equity lines of credit.”