Over the last couple of decades payday loans have gained prominence because of the fact that so many consumers are using them to get fast cash in a pinch and also, unfortunately, because of the fact that, when all is said and done, it’s usually the consumer gets severely pinched.
Now along comes away for lenders to take advantage of American consumers even more; title loans.
Every year in the United States approximately 2.5 million people generate nearly $3 billion in revenues for title loan lenders. That’s according to a new report by The Pew Charitable Trusts, who say that, in comparison to the $9 billion generated every year by payday loans, title loans might seem small in comparison. The problem is that, as far as consumers who use them are concerned, the potential they have to damage their finances is much worse.
The reason is the way that they work. In most cases a borrower who is in desperate need of cash will use their car as a collateral to get a short-term loan in exchange for their title. These loans are typically 30 days and depend on a number of things, most importantly the value of the car. This value is determined by the lender, usually when the consumer is on-site at their store and, on average, are $1000. In most cases they are paid back either in installments or one lump sum called a “balloon payment”.
The way that title loan lenders make their money is by charging all sorts of extra fees (much the same as payday lenders). For example, most title loans have an upfront fee of $250. Also, if the person who borrowed the money can’t pay it back within 30 days, they either have to give their car to the title loan lender or pay another $250 in order to extend their loan.
What that does, in many cases, is set up a vicious cycle where the borrower ends up paying an awful lot more for their loan than they thought they would. In fact, it averages $1200 in extra fees, turning a $1000 loan into $2200 instead.
One of the bigger risks of title loans is also that they are easy to qualify for and, at $1000 or more, are typically 50% more than the borrower’s monthly income. In other words, they’re extremely difficult to pay back.
Many title loan lenders have started outfitting cars with GPS tracking devices as well, which gives them the ability to not only locate the vehicle if the owner misses a payment, but also to remotely lock the car so that they can’t drive it. Also, after only one missed payment a title loan lender could technically repossess a person’s car but, in most cases, they don’t because it’s much more lucrative to simply advance the borrower’s loan.
As with payday loans, title loans have their (very high) share of predatory lenders who take advantage of consumers any way that they can. In many cases these borrowers end up paying hundreds, if not thousands, of dollars more than they thought they would.
One bit of good news is that, just like payday loans, the government is stepping in to change the laws about title loans. For example, in New York state, payday loans have been capped at 25% and, because of that, are almost completely extinct now. It’s hoped that the same thing will soon happen to title loans.