En español | 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.
So while the car title loan might help you pay the initial bill, "now you're in much worse shape," Speer says. "Overall, it's just going to wind up being an even bigger crisis and your situation is going to be much worse."
Repeated messages left for the American Association of Responsible Auto Lenders, an industry trade group, weren't returned. However, Pat Crowley, a spokesperson for the Ohio Consumer Lenders Association, which represents title lenders in that state, says the loans are "very well priced" in comparison to alternatives. "We are fully regulated. We are very transparent about the fees we charge, and our fee structure is very clear," Crowley says.
"We feel that auto title loans are actually less expensive than other types of unsecured loans," he says.
Here's How Car Title Loans Work
When you get a title loan, it's a short-term loan — usually for just one month — that you secure with the title to your vehicle. Although the majority of title lenders require you to own your car outright, some don't. Either way, the lender puts a lien on your car. When you repay the loan, the lien is removed and you get your title back. Sounds easy enough, right? Generally speaking, it is. Even retirees can obtain car title loans, as long as they have a valid photo identification and proof that they own the vehicle. In many states, there isn't even a credit check.
The loan amount is based on the appraised value of the vehicle, and it's typical for consumers to be able to borrow anywhere from 30 percent to 50 percent of their car's worth.
And here's where car title loans get dicey.
Just like their cousins — payday loans — car title loans impose triple-digit annual interest rates on consumers. And when you combine very high rates with very short repayment periods, it's a recipe for financial disaster. Borrowers who can't repay the entire loan on time typically wind up rolling these loans over month after month, incurring additional "rollover" fees and interest.
For those who can't pay and who don't roll over their loans, the lenders repossess their cars — a potentially disastrous scenario for those in or approaching retirement, and for individuals who rely on their cars to get to work, medical appointments and other places.
A 2013 joint study conducted by the Consumer Federation of America and the Center for Responsible Lending found that the average consumer takes out a car title loan for $951 and renews the loan eight times.
With an average annual percentage rate (APR) of about 300 percent, consumers end up paying about $2,142 in interest alone, according to the study.
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And one in six loans ends in repossession of a car, costing added fees of $400 or more, the study found.
Due to the many potential pitfalls of car title loans, lawmakers and consumer advocates have rallied to stem their use.
While high-interest title lending is banned in more than half the states, the industry continues to thrive. That's because several states have loopholes that allow vehicle title lending to continue unchecked.
In one state, Virginia, business is especially booming, thanks to a 2011 change in state law that allows car title companies to offer loans on cars titled out of state.
Now consumers from border areas, such as Maryland and Washington, D.C., flock to Virginia for car title loans.
According to the Virginia State Corporation Commission, car title lenders in Virginia issued more than 161,500 loans worth about $180 million in 2012, up from nearly 128,500 loans worth more than $125 million made in 2011. Of the more than 132,000 individuals who received those loans, 20 percent of consumers were 60 days or more late with payments and more than 13,000 vehicles were repossessed.
As an alternative to car title loans, consider borrowing money from family members or your church, Speer says. "You can also cut back on expenses, ask your employer for an advance on your salary if you're working, or even ask the power company to give you more time to pay your bill," says Speer.
It's best to avoid these loans — no matter how badly you need the money.