Sunday, March 22, 2015

Title Loans

Yesterday I received an advertisement from a local title loan company in the mail. While not as despicable as their close cousin the unsecured payday loan, title loan companies prey on the poorest and most ignorant members of our society.

The very poor with bad credit, perhaps as the result of bankruptcy or divorce, have little or no access to legitimate financial institutions for small “bridge” loans of less than $1,000. Banks and Credit Unions seldom make loans for less than $1,000. As due diligence these institutions will always run a credit check on the borrower. If their credit score is below the bank’s threshold, no loan will be issued.

The title loan business started appearing in the 1990s. These loans can be described as filling a gap between the pawn shop that would make a loan under more reasonable terms since it would hold both the title and the car and the inexcusably usurious rates offered by unsecured payday loan.

The pitch is a loan up to $20,000 with no credit check, “flexible payments,” and you get to keep your car, at least for a while. Typically the size of the loan will be limited to 30% to 50% of the expected value of the car at auction, since repossessing the automobile in the case of a default will add time cost and legal costs to the unpaid portion of the loan. These companies claim that the typical loan runs in the $300 to $500 range. Depending on state law, interest rates can run into the triple digits. Some states have limited the rate to 36%. Coincidently, a 36% annual interest including all fees is the maximum amount that can be charged a member of our armed forces. Congress had to take action, as too many servicemen were losing their security clearances as a result of bad credit or excessive debts.

The victims should understand why they asked to provide proof of registration, a government issued picture ID, proof of residence, and an extra key to the vehicle when applying for a loan. The company wants to know where to send the repo man when the time comes to seize your car.

What isn’t clear from the advertisement is that these companies are looking for poor, uneducated, unbanked or under banked customers whom they can trap in a cycle of debt that all too often ends with the loss of the car. An Illinois study indicates that about 20% of all title loans are used to pay off other title loans. The back end of many title loans contains a “balloon payment” that is significantly higher than the previous payments. This means that a considerable portion of the loan remains unpaid at the end of the term of the loan. If someone is cash strapped badly enough to need one of these things, chances are they will not have the money necessary to make that last payment, giving the lending institution the opportunity to make some more money off the misery of the poor.

If you are considering such a loan or know of someone who is considering a title loan, stop and take some time to consider your options. Ginna Green, spokesperson for the Center for Responsible Lending, notes title loans didn’t exist thirty years ago. She recommends exploring possible personal sources, like asking your employer for an advance, or asking a friends or a family member for a personal loan. She also observes that churches and community groups maintain benevolent funds to help members in times of trouble. Finally, she notes that some credit unions will make small unsecured loans on reasonable terms. I expect that would be more likely if your paycheck was direct deposited to your credit union account.

Here are the cold hard facts from Bankrate.Com

About 1.7 million car title loans originate every year.
The average car title customer pays $2,142 in interest on a $951 loan and renews the loan eight times.
About 7,730 car title lenders operate in 21 states, charging borrowers $3.6 billion in interest on $1.6 billion in loans each year.
A typical borrower receives cash equal to 26 percent of a car's value and pays an annual percentage rate of 300 percent.

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