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Published: December 10, 2008
Predatory lending practices are no longer the domain of payday loan shops. While payday lenders have attracted the most attention from consumer activists, another insidious lending practice has crawled out from the basement to prey upon those least able to pay for high interest loans.
They are called car title loans and usually work like this: A borrower gives the title to his vehicle and a copy of its keys to a lender in exchange for a loan of up to about half the car’s wholesale value. Typically the loans are less than $1,000.
The borrower agrees to pay the loan plus triple-digit annual interest and other fees. Often, he must pay back the loan in a month or two. If the borrower falls behind, he could lose his car, which is more often than not the family’s only source of transportation.
Here’s an example of a car title loan’s usurious repayment schedule. Making the minimum payments for two and a half months on a $400 loan, the borrower would have paid $374 and still owe $300.
Advocates for the poor say the short-term, high interest loans that can reach interest rates of 360 percent on an annual basis can be even more disastrous than payday loans. “They can both trap borrowers in long-term debt, but with the payday loan, the collateral is a personal check,” Leslie Parrish, a senior researcher for the Center for Responsible Lending, said earlier this year. “With a car title loan, it’s probably the family’s most important asset.”
In Virginia, a title loan of $500 carries a $125 interest payment for one month. In addition, borrowers must pay fees, including an “annual membership fee” and another fee for having a lien recorded on the title. One lender in Hampton Roads, for example, charges a $50 membership fee and a $6 car title fee.
Another consequence of car title loans is a high repossession rate. Borrowers have only 15 days to make the first payment on a loan and are at risk of repossession upon missing that first payment.
As The Washington Post reported recently, car title lending is one of several nontraditional loan businesses gaining popularity in Virginia. Like payday lending, the practice is under increasing scrutiny in the state from a broad coalition of religious and consumer advocacy groups.
The advocates are concerned that the services prey on desperate consumers and say their exorbitant interest rates should be capped. The practices are illegal in dozens of states, including Maryland and the District of Columbia.
So how can Virginia eliminate this predatory lending practice? The solution lies with the General Assembly, which meets in January. There, advocates will push for legislation that would regulate title loan businesses under the state’s Consumer Finance Act by limiting annualized interest rates to 36 percent, as is the case for the other two dozen companies in the state that offer unsecured loans.
The car title lenders are able to operate in Virginia because they offer what are considered open-end loans, similar to credit card arrangements, which exempt them from the regulations that consumer advocates are seeking. About 150 title loan stores exist around the state, compared with about 800 payday lenders.
There’s nothing unreasonable about the imposition of a 36 percent cap on interest rates on the car title lenders in Virginia. The Assembly tried and failed to reach such a cap for payday lenders, a move that should come up again in the new legislative session.
The car title lenders, however, have fallen back on the same argument advanced by the payday lending industry. A lobbyist for one of them, LoanMax, the second largest auto loan company in Virginia, said that reducing the interest rate to 36 percent would effectively put the company out of business.
So be it. Such an alternative is far preferable to preying on the poor at the ultimate expense of depriving them of their only means of transportation.
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You might hold your tongue from calling these shops “usurers”. Title lenders are now many people’s last option for a loan. Usurers are exactly who will step in to fill the void if title lenders are sent packing. Expelling payday lenders has not stemmed the demand for loans by the financially challenged in Virginia. If businesses are not allowed to provide loans legally, other players will step and do so illegally.
I’ll tell you now that I have used the payday loan people before myself. As PaydayLender points out an overdraft fee of 29$ on a $100 overdraft is 755% APR. With these days of the internet and automatic payment drafts from the bank account, there are times when my paycheck comes up 1 day late. 20 years ago, 1 day late meant I delayed sending the payment in by 1 day. Nowadays it means the debit hits the bank at 11:59pm on Thursday and my deposit hits the bank at 12:01am on Friday. So for a 2 minute loan I pay $29. I may only have overdrawn by $1.00. So what’s the APR on a $1.00 loan that was taken out for 2 minutes and the payback was $29.00? Wanna figure that one out?
I found out a long time ago that the fees the payday advance people charge is less than 1 overdraft charge at the bank. And usually if it’s 1 overdraft, it’s 5 or 10. No way do I want to lose that option when I need it. Only the banks will benefit when they close the payday advance places. I for one believe that the payday advance place has saved my wallet at least as much as I have paid for the loans themselves. Not to mention having paid my other obligations on time and not 1 day late.
If you want to talk preditory lending, go to the banks, that’s where you will find it.
Now this notion of a car title loan sounds a little risky to me, but as someone else pointed out, I haven’t walked a mile in someone else’s shoes.
Umm cosmo, you might want to rethink the no docks in Atlantic City thing, I guess you’re not into oysters. If you want to get on the any of the gambling boats on the West Virginia-Ohio border(Ohio River) You might stay drier if you use the boardwalk.
Was being facetious about the loan sharks, maybe it was facetiousness…
Payday Lender, where I’m from we call it loan sharking, with Guido wearing a handsfree phone. I can get better terms on the docks in Atlantic City, or a boardwalk on the Ohio River.
Did that guy just call me a liberal?
Referring to payday loans as predatory is a misnomer. “Defining and Detecting Predatory Lending,” a study by Donald P. Morgan, Research Officer, Federal Reserve Bank of New York, concludes that payday loans do not fit the definition of predatory because they are not a “welfare reducing” form of credit. To the contrary, the author suggests that payday lenders enhance the welfare of households by increasing the supply of credit.
Payday loans and car title loans shouldn’t be lumped together like this. In most of the 37 states that regulate payday lending, rollovers or loan extensions are either limited or prohibited. In states without limits, CFSA members limit the number of rollovers to four. It is not possible for someone to rollover an advance for an entire year or to accrue the kinds of fees claimed by payday lending critics and as even the article points out, the collateral is simply a personal check.
In either instance, phrasing the interest rates in terms of APR is misleading. The only way to reach the much-hyped triple digit APR is to take out one advance and continue to renew the same advance every two weeks for an entire year. State laws and industry best practices do not allow this to happen. Payday advance compares favorably to many consumer alternatives, even when expressed as annual percentage rates for two-week terms: $100 payday advance with $15 fee is 391% APR.; $100 bounced check with $55.59 NSF/merchant fee is 1449% APR; $100 credit card balance with $37 late fee is 965% APR; a $100 utility bill with $46.16 late/reconnect fees is 1203% APR; a $100 off-shore Internet payday advance with $25 fee is 651.79% APR; $29 overdraft protection fee on $100 is 755%.
The only reason payday loans should be included in this article is to show that car title loans are not an acceptable substitute and thus to emphasize that consumer choice must be maintained.
nonpc: You clearly don’t get the difficulties of being poor and poverty. I’ve worked in field for some time including affordable housing and mental health fields and have dealt with people of low income for some time. Many are exceedingly hard working and working from paycheck to paycheck. Life circumstances including health problems, marital problems, accidents that many of us experience knock many of those folks over the edge where they need money. Heck, many people with very ample incomes live paycheck to paycheck as well hoping some sort of crisis does not throw them into total debt. What I also know is I can’t fully understand it until I live in it.
Yup, everyone has an opportunity through education to pull themselves up by the bootstraps. And, I know numerous stories of courage by people of low income who choose to live morally and take care of their responsibilities and who suddenly, despite their efforts, find themselves on the outside looking in. I also know of a multitude of situations where people have disabilities, cannot work when they would give anything to earn a living, receive as little as $637 per month in SSI, and are expected to live on that amount. In many ways, they know more about life than you and I ever will.
Predators feast on these folks. Nope, people who are poor may not fully understand the ramifications of a predatory loan. They just need the money. That does not give those loaning the right to feed off them. That is completely immoral and unethical and needs regulation, period.
Your comments about “new car”, etc., seem to run these folks down and I experience as arrogant. How many people really do understand the terms of their mortgages, educated or not? How many people do really understand the intricacies of saving, borrowing, and spending?
Everyone in our democracy is supposed to have an equal chance. Is that true when we subsidize some industries over others, create regressive taxes like sales taxes, and in times of economic hardships reduce drastically any services that serve to boost people of low income educationally as well as help build their wealth?
Hope you have a great day.
Geez, here we go again.
First, quoting an annual percentage rate is ignorant, stupid and misleading because these loans don’t last a year. They usually last no more than 90 days.
Second, the people who utilize these operations do so because they have nowhere else to get a line of credit. And with banks not even loaning to well-funded people these days, title loan stores and payday loan operations are the only avenue for many to turn to for help when it’s needed.
Third, the default rate on these loans is three times the rate of banks. These stores have a right to charge more for these loans when they are taking a bigger risk to make them.
Fourth, no one is putting a gun to anyone’s head to force anybody to go into these stores and accept these loans. The terms are always explained in full and the loanee always has the opportunity to go in, see the price, and decide not to take the loan.
Isn’t it funny how the good little liberals who think they’re smarter than the average person are the only people whining about these stores? The people who use them, as a rule, have no complaints. Why? BECAUSE THEY ARE SATISFIED CUSTOMERS!!!!! They are happy they can get loans and they make their payments on time. The ones who default knew the score and accept the consequences.
It’s not up to the good little liberals to think for the poor. The poor can do that for themselves. You want to counsel them to stay away? No problem. But many people need these stores to deal with unexpected things that pop up. The liberals would have the poor not worry about those unexpected things. And as usual, the liberals are wrong.
Unless you libs can talk banks into making $500 loans to people with no credit, leave these places alone!
A little counseling goes a long way www.creditcounseling.org and it’s FREE.
To use your vehicle for a title loan it must have a clear title, it has to be payed off. Odds are the mentality of the group of borrowers for this type of loan didn’t have a new car they worked hard for and made payments on for up to 60 months. Most of the cars used are probably older models that have high miles and a fairly low bluebook value they bought from a private seller for cash.
A fool and his money are soon parted. It’s a good thing for these math challenged participants they don’t have an “organ loan” program or they would all be on dialysis on the public nickel.
Let the borrower beware
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