Source: U.W. Law School Consumer Law Clinic
We have all seen the advertisements, and the theme is always the same: “Need cash fast? Let us help!” When money is tight, it sounds good – maybe even too good to be true. Like we were taught as kids, if something sounds too good to be true, it probably is. In the case of auto title loans, one of the industries that uses these advertisements, it is definitely too good to be true.
What is an auto title loan?
Auto title loans are the fastest-growing form of high-cost, high-risk loans in the country. Auto title loans are also known as car title pawns, car title loans, title pledge loans, sales and leasebacks, or motor vehicle equity lines of credit. They are marketed as small “emergency” loans and are secured by the title to a borrower’s vehicle. The annual percentage rate (APR) on auto title loans is in the triple digits, typically around 300 percent.
How does an auto title loan work?
Because auto title loans are secured by the title to a vehicle, the vehicle must be paid off in full before you can take out a loan. The lender will then advance a fraction of the vehicle’s value, typically a few hundred to a few thousand dollars. The loan must be paid off in full at the end of the designated time period, usually one month. During the time of the loan, the borrower stays in physical possession of the vehicle, but the lender retains the title.
If the loan cannot be repaid, there are usually three possible consequences: 1) The loan is “rolled over” (extended, with additional interest or fees due); 2) The car is repossessed; or 3) Legal action is taken against the borrower in the form of a lawsuit to recover the unpaid amount.
Why are auto title loans dangerous?
Auto title loans are dangerous because it is so easy to fall into a cycle of debt and loan rollovers. A person who needs a title loan rarely has money to cover the loan and fees in addition to his or her usual expenses, much less emergencies like illnesses. When that happens, the debt grows through a rollover. Say, for example, a lender advances a $600 loan. The finance chargeon that loan is $150 and must be paid up-front. At the end of the period (usually one month), $600moreis due to the lender. If the borrower does not have this $600, he or she can pay an additional fee (another $150) and the loan is rolled over until the next pay period. At the end of that period (usually another month), the original $600 loan will cost $900. And because many consumers must roll over these loans multiple times, this cycle continues until it is broken by repossession of the car or other legal action against the borrower. These actions also have negative consequences for the consumer’s credit ratings.
Another reason auto title loans are so dangerous is because some businesses have found ways to convince borrowers that they will not fall into this trap. One such method is to offer a lower APR, making a title loan seem like a less risky option. However, these lower APRs are often tied to very high fees to make up the difference in profit. Some lenders require payment of additional fees for random miscellaneous “expenses”, such as membership in a special club.
What alternatives exist for consumers? Consumers facing financial distress should look first to their community for assistance. Although resources will vary from community to community, there may be some available assistance for:
* Child care/Children’s Services
* Clothing
* Medical/Dental
* Utilities
* Food
* Rent
* Veterinary
* Other emergency situations
Consumers can try contacting their county human services department, clinics, churches, community centers, or direct providers for more information on available programs and services. Additionally, financial counseling services are available in many areas to help consumers avoid situations that may lead them to auto title lenders.
We have all seen the advertisements, and the theme is always the same: “Need cash fast? Let us help!” When money is tight, it sounds good – maybe even too good to be true. Like we were taught as kids, if something sounds too good to be true, it probably is. In the case of auto title loans, one of the industries that uses these advertisements, it is definitely too good to be true.
What is an auto title loan?
Auto title loans are the fastest-growing form of high-cost, high-risk loans in the country. Auto title loans are also known as car title pawns, car title loans, title pledge loans, sales and leasebacks, or motor vehicle equity lines of credit. They are marketed as small “emergency” loans and are secured by the title to a borrower’s vehicle. The annual percentage rate (APR) on auto title loans is in the triple digits, typically around 300 percent.
How does an auto title loan work?
Because auto title loans are secured by the title to a vehicle, the vehicle must be paid off in full before you can take out a loan. The lender will then advance a fraction of the vehicle’s value, typically a few hundred to a few thousand dollars. The loan must be paid off in full at the end of the designated time period, usually one month. During the time of the loan, the borrower stays in physical possession of the vehicle, but the lender retains the title.
If the loan cannot be repaid, there are usually three possible consequences: 1) The loan is “rolled over” (extended, with additional interest or fees due); 2) The car is repossessed; or 3) Legal action is taken against the borrower in the form of a lawsuit to recover the unpaid amount.
Why are auto title loans dangerous?
Auto title loans are dangerous because it is so easy to fall into a cycle of debt and loan rollovers. A person who needs a title loan rarely has money to cover the loan and fees in addition to his or her usual expenses, much less emergencies like illnesses. When that happens, the debt grows through a rollover. Say, for example, a lender advances a $600 loan. The finance chargeon that loan is $150 and must be paid up-front. At the end of the period (usually one month), $600moreis due to the lender. If the borrower does not have this $600, he or she can pay an additional fee (another $150) and the loan is rolled over until the next pay period. At the end of that period (usually another month), the original $600 loan will cost $900. And because many consumers must roll over these loans multiple times, this cycle continues until it is broken by repossession of the car or other legal action against the borrower. These actions also have negative consequences for the consumer’s credit ratings.
Another reason auto title loans are so dangerous is because some businesses have found ways to convince borrowers that they will not fall into this trap. One such method is to offer a lower APR, making a title loan seem like a less risky option. However, these lower APRs are often tied to very high fees to make up the difference in profit. Some lenders require payment of additional fees for random miscellaneous “expenses”, such as membership in a special club.
What alternatives exist for consumers? Consumers facing financial distress should look first to their community for assistance. Although resources will vary from community to community, there may be some available assistance for:
* Child care/Children’s Services
* Clothing
* Medical/Dental
* Utilities
* Food
* Rent
* Veterinary
* Other emergency situations
Consumers can try contacting their county human services department, clinics, churches, community centers, or direct providers for more information on available programs and services. Additionally, financial counseling services are available in many areas to help consumers avoid situations that may lead them to auto title lenders.
