Title Loan: Don’t risk losing your car

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Although car title loans are marketed as quick and easy solutions to a financial emergency, their use only worsens financial problems for borrowers. This loan uses a borrower’s personal vehicle as collateral and additionally charges triple-digit interest rates, like those of payday loans.

Usually the amount of a car title loan is much less than market value for the car. The length of a car title loan can vary from as short as 10 days to a month or even longer. And just like a payday loan, car title loans require full repayment.

For most consumers, the loss of a car brings new challenges like how to reliably get to work or to a doctor or a grocery store.

Fast Facts

Fast Facts--Car Title Loans

Car title loans are based on the value of a borrower’s car – the ability to repay the loan is not a factor in the lending decision.
Lenders hold onto the title of the vehicle. If the borrower cannot repay the loan when it comes due, the lender has the legal right to repossess the car from the borrower.
The nation’s largest car title lender’s average loan is about 25% of the vehicle’s retail value.
Loan rates for car title are typically 20-30 times that of rates charged by credit card issuers.
While most car title loans are due within a month, most borrowers are unable to fully repay the loan and interest within 30 days.
The average car title customer renews their loan 8 times.
On a $500 title loan, this average customer will pay back $650 in interest over eight months; the principal borrowed will be in addition.
Because of renewals, title lenders derive far more profit from triple-digit interest than from loan principal.
Today, 31 states have outlawed high-cost car title loans.
In 2006, President George W. Bush and Congress capped car title loans at 36 percent annually for members of the military.

More Fast Facts

What Are The Problems?

What are the problems with car title loans?

Car title lenders tell customers about loan fees that really amount to triple digit interest that can run as high as 300% or more.

The short length of a title loan, often only 30 days, requires borrowers to pay principal and interest in a single payment. These terms make it difficult for borrowers to fully repay and the result is a cycle of debt that is harder to retire with each renewal.

When borrowers can no longer afford mounting interest due, the lender takes possession of the vehicle. The borrower is then left with new and even more difficult problems in daily living.

What Are The Solutions?

How to win the war against car title lending

Enact a 36 percent rate cap and limit the number of loans allowed. The best way to curb predatory lending is to enact a 36 percent rate cap for all consumer lending. State lawmakers have the power to ban title loans, end triple digit interest rates on consumer loans and close existing loopholes in state laws. See which states either explicitly allow title lending and those with loopholes.
Pay attention to the APR. Car title loan rates can range from 84% to as much as 300% and more. Don't be fooled by the "small and easy" initial fee, more often than not, people end up taking loan after loan in an endless cycle of debt.
Shop Around. Because car title loans are heavily advertised as quick and easy ways to give you instant cash, you may fall easily into their trap, but before you sign your car away, go to your nearest bank or credit union to see what other options they may have; or if you can help it, avoid a loan altogether by asking your friends and family for help.
Keep a savings account for a rainy day. It's possible. Keeping a few extra dollars in a saving account can help you avoid being caught by title lenders next time you are in a bind.
Stay clear from of all predatory loans. Payday loans, refund anticipation loans, and overdraft loans are not better options, so stay clear from all those false choices as well.
Avoid forced arbitration clauses. If you must take out a car title loan, be sure to avoid any forced arbitration clauses in your contract so you may take any disputes or complaints directly to a judge.
Learn from those who are already fighting predatory lending:
- "Our state legislature's done a good job of keeping payday lending and car title lending out of Maryland, and we're concerned about surrounding states who would basically allow Maryland consumers to cross the border to get them." – Steve Sakamoto-Wengel, Deputy Chief of Maryland's consumer protection division to Associated Press May 2011
- "We cannot prevent consumers from traveling to other states to get ill-advised title and payday loans," Attorney General McGraw said. "But when companies contact West Virginians who allegedly default on the loans, they must obey our state’s debt collection laws. If companies break these laws, my office will not hesitate to intervene." – West Virginia Attorney General Darrell McGraw, April 2011

What Others Are Saying About Title Loans

“The ABC15 Investigators took each location of a licensed title loan business and plotted them on a map. We found high concentrations in areas with high poverty rates according to the most recent census data."

–Joe Ducey, ABC 15 Investigative Reporter, Phoenix, AZ, July 2011

“Is there a legitimate business in our nation today which might be able to charge a 300% annualized rate of interest? Well, I guess that would depend on how one defines legitimate. I think it would be safe to say that if you are doing business with somebody who charges a 300% annualized rate of interest, you would want to be VERY CAREFUL. What type of business has got these kinds of rates? Car title loans.”

--Larry Doyle, Business Insider Columnist, July 2011

“Car-title loans, which allow you to borrow against the value of your vehicle, are such bad deals that more than half of the states, including Maryland, basically don't allow them. “Yet consumer protections are only as strong as the weakest laws in neighboring states. Even if one state bans the loans, its residents can drive across the state line and borrow at whatever loan terms are allowed there.”

–Eileen Ambrose, Reporter with The Baltimore Sun, February 2011