Car Title Lending: Driving Borrowers to Financial Ruin
Published: April 14, 2005
Like payday loans, car title loans are marketed as small emergency loans, but in reality these loans trap borrowers in a cycle of debt. Car title loans put at high risk an asset that is essential to the well-being of working families -- their vehicle.
A typical car title loan has a triple-digit annual interest rate, requires repayment within one month, and is made for much less than the value of the car. Title loans are typically made without regard to borrowers' ability to repay. Because the loans are structured to be repaid as a single balloon payment after a very short term, borrowers frequently cannot pay the full amount due on the maturity date and instead find themselves extending or "rolling over" the loan repeatedly. In this way, many borrowers pay fees well in excess of the amount they originally borrowed. If the borrower fails to keep up with these recurring payments, the lender may summarily repossess the car, often stripping borrowers of their most valuable possession and only means of transportation.
Although high-priced title loans are illegal in most states, the title lending industry has grown tremendously in recent years in states that have failed to take adequate steps to protect borrowers. Title lenders have made generous campaign contributions, and industry-friendly laws have passed in some states at breakneck speed. In other states, 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" or "pawns" when in fact that is not the case.
In light of the title lending industry's history of evasions and abusive practices, states that permit small loans to be secured by the title to the borrower's vehicle should enact strict legal requirements to ensure that borrowers are well protected, including the following:
- Establishing Fair and Affordable Loan Terms. Title loans should have a longer loan term and provide borrowers an affordable installment repayment schedule rather than requiring one massive lump sum payment shortly after the loan is made. Rates should be limited, and lenders should consider their customer's ability to repay before making a title loan. Borrowers should also have a right to cancel loans within a reasonable time after obtaining them and a right to prepay loans without penalty at any time.
- Protecting Borrowers After a Default. States should provide borrowers with protections in the event of default, since the car is often the borrower's largest asset and essential to the borrower being able to retain employment and access to services. These post-default protections should include reasonable repossession procedures, a right to redeem, commercially reasonable sales, return of surplus after sale, and a prohibition on personal liability after repossession. Car Title Lending: Driving Borrowers to Financial Ruin
- Closing Loopholes to Ensure Consistent Regulation. States that permit title lending should close loopholes regarding what loans are covered and ensure that laws apply to all lenders, including those that operate interstate.
- Monitoring Lenders Through Licensing, Bonding, Reporting, and Examination Requirements. States with active title lenders should enact strong licensing, bonding, reporting, and examination requirements to ensure that the lenders are closely monitored.
- Ensuring Borrowers Can Exercise Their Rights. Borrowers should have a private right of action and a right to void contracts that lenders enter into in violation of the statutory requirements, so that they can exercise and enforce their rights. Binding mandatory arbitration clauses that operate to deny borrowers a fair chance to challenge abuses in court should also be eradicated from title lending agreements.