Title Loans Drive Many Consumers Into Deeper Debt

Eric L. Wesson

They’re everywhere.
The title loan industry has grown by leaps and bounds in recent years.
As of late 2004, Missouri had licensed over 230 title loan locations. In California, car title loans amount to a $20 million industry, according to a recent report issued by the Center for Responsible Lending.
Title Loans of America, one of the country’s major title lenders, have 150 title loan stores in 18 states, issuing approximately 250 loans each year, the report says.
Using cars as collateral, this new form of “predatory lending” is marketed toward cash strapped consumers.
However, failure to meet the terms of the loan can result in a late-night repossessions by lenders who have a duplicate set of keys.
Title loans trap borrowers in perpetual debt through unaffordable balloon payments, high interest costs, and the threat of repossession,” said Ms. Jean Ann Fox, director of consumer protection for the Consumer Federation of America.
Title loan agencies charge a median of 25 percent per month finance charge which translates into an interest rate of about 300 percent.
In addition, they charge fees of $25 per loan. Loan costs range from $62.50 to $181 for a one-month $500 title loan, according to a study conducted by Consumer Federation of America.
What is interesting is that even if a consumer is paying on the loan and their car is sold, they can still wind up owing money to the title loan company.
“Once the loan is defaulted the interest continues to accrue,” said Brian Downing, a former title loan agency employee. “If it takes them three months to sell the car then they accrue the interest during that period. Say they sell the car for $500 and you defaulted on owing them $400. You would think you would be $100 ahead, but you could actually be hundreds of dollars behind,” he said.
“In most cases they don’t even advertise the car is for sale, they just sit it outside. Well the interest is still running. If they do advertise it then they can consider the cost of the ad as a loan and charge you for that with interest. People need to really read the fine print and get a clear understanding. I worked for them for three years and I don’t ever remember seeing anyone pay off a loan,” Downing continued.
“Any time my supervisor would close out a loan she would bring a check and cash into the closing to cash the check in front of the customer. The concept was to have the people go along the terms because the money was sitting right there in their face. She would always be in a hurry so the people would think the money was going to get away from them if they didn’t hurry and do something. Sort of like dangling a T-bone steak in front of a starving man,” he said.
Ms. Rachel King, 34, borrowed $1,750 against her 2002 Pontiac Grand Prix.
“As long as I am black I will never barrow another dime from them I don’t care what the emergency is. They taught me a very valuable lesson,” Ms. King said.
Ms. King explained that she had to borrow the money for the beginning of the school year to get things for her children and to settle into a new apartment after she and their father split up.
“If I remember correctly, the loan cost me about $5,200 all together. The reality is that I had to go to a credit union and have someone co-sign for me to get a loan to pay them off after one of my church member found out about my loan,” she said.
“It was a very bad experience. There would be times when I couldn’t sleep at nights. The people would call me at least twice a day about the loan even before the payment was due. It was just horrible,” said Ms. King.
THE CALL wanted to experience first hand what the process would be if we received an auto title loan from one of the country’s largest auto title loan companies in Chicago.
A 2006 Chrysler 300 Touring Sedan has a maximum loan amount of $8,000 with the title loan company even though its blue book value is much higher.
I was given a choice of a 30 day, 90 day or 120 loan agreement with an interest rate of 30 percent. What the agent would not explain over the phone was how the interest rate was compounded.
After receiving the terms of the agreement with hidden and overhead charges, the loan would have cost me 43 percent interest per week or $344 per week. This would have broken down to $1,376 in interest. Couple the interest payment with the principle payment and one would have a payment of $3,376 for a one-month loan, $10,128 for a three-month loan and $20,256 for a six-month loan.
The fine print also meant paying interest on the principle amount that was borrowed, not the declining balance.
Many state laws prohibit lending at an interest rate in excess of a certain statutory maximum known as the “usury limit.”
Unless otherwise stated, the rates are simple, not compounded interest rates.
In Missouri, unless the loaning institution is a bank or pawnbroker there is a legal interest rate limit of 9 percent.
However to circumvent the legal limits, many companies are owned by banks, who can legally charge a higher rates such as Utah, Nevada, New Mexico, New Jersey and Idaho.. The highest interest rates charged on credit cards belong to jewelry stores. In many states such as those listed above state lawmakers allow them to charge a “luxury tax” on jewelry which allows them to ballon the interest rates in even higher the the “usury limit” and other interest finance rates. Jewelry credit card rates range around 25 to as much as 31 percent.
Dennis Avery II, a local financial manager, told THE CALL that consumers should beware of where the loan company’s lending bank is located.
“Surprisingly most of these type of companies are owned by banks and other institutions in other states,” he said.
“My advice to people is always to try to secure a loan from a credit union or try to get a co-signer rather than deal with agencies that might be presumed as predatory lenders,” said Avery.
“In the alternative, use an agency that has a cap on the amount of money that can be charged under the usury law according to the laws of the state they are based out of,” Avery said.
“”I run across people all the time and try to explain to them what has happened to them. But they can’t get over the fact that even though their loan originated in Kansas City it is governed by the laws in the state that the bank is home based out of,” he said.
Avery also said that the only way to avoid borrowing money is to save regularly. “The key to avoiding all problems is to save. If people took the time to write out a weekly budget and stick to it they would be surprised on how much money they could save every week,” said Avery.
Avery provided the following money saving tips:
• Monitor daily spending- Keep a log and write down everything you spend in a day. This usually takes a month to determine how much money you actually waste.
• Eat in- You can save a great deal of money taking your lunch to work instead of eating out. Plan meals that are low cost.
• Don’t bank on it- Pay credit-card bills in full as soon as possible, and take advantage of free bill pay. The real savings can be had by avoiding credit-card debt and paying off what you’ve accumulated as quickly as possible.