When you're living on a fixed income or facing bills you can't afford to pay, it can be tempting to consider borrowing from places like car title loan companies.
After all, these lenders put cash in your hands in a way that's convenient, fast and relatively drama-free — at least, at first.
Yet a car title loan is "absolutely the wrong way to deal with a short-term financial problem," says Jay Speer, executive director of the Virginia Poverty Law Center, a nonprofit that advocates on behalf of the state's low-income citizens.
"A loan is when you have the ability to repay," he says. "But car title lenders don't even assess that. So that's called loan sharking. And loan sharking means tricking someone into a debt cycle that they can't get out of. The lender just wants you to keep paying interest," according to Speer.
Car title lending is a $5.2 billion-a-year business, according to the Center for Responsible Lending. About 7,730 car title lenders operate in 21 states, costing borrowers $3.6 billion in interest on $1.6 billion in loans.
While state officials and car title companies don't keep records about the age of borrowers, a healthy chunk of these loans may be going to middle-age and elderly consumers. About 20 percent of older Americans have used car title loans, according to a 2008 AARP national survey called "A Portrait of Older Underbanked and Unbanked Consumers."
One in five people ages 45 to 64 with incomes under $50,000 has used a vehicle for a short-term loan. And about one-third of people ages 65 and older have received car title loans.
"The reason almost everyone gets these loans is normally to pay an immediate expense," such as a gas or electric bill or a credit card bill that's due, says Speer.
But the average person who borrows $1,000 from a title loan company typically winds up paying back about $3,000 to $4,000, he says.