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Texas: The Wild West of Auto Title Lending


They say everything’s bigger in Texas. If they’re referring to the costs and risks associated with auto title loans, they aren’t wrong.

Most people have probably heard about the predatory nature of payday loans and title loans. These dangerous products take advantage of consumers through extremely high interest rates (averaging 300% APR[1]) and unreasonable terms. By this point, we should know enough to stay away from these costly loans. Unfortunately, there are many who wrongly believe these are their only options in a time of need.

Those with bad credit, lower income, or lack of financial know-how are falling into the traps of predatory lenders every day. For these consumers, an affordable and safe personal loan seems out of reach. Banks and credit unions typically have high standards for issuing loans, and those with low credit scores are usually left behind. This leaves people wondering where they can get the money necessary for rent, unexpected repairs, or emergencies. And if they have a checking account or own a car, then they may be tempted to pursue a predatory loan.

Due to the high likelihood of borrowers getting stuck in a cycle of debt, some states now enforce laws to prevent such practices. Some cap the amount of interest a lender can charge, while others may set a maximum loan amount or minimum repayment period. But if you live in Texas (or “The Wild West of Auto Title Lending”, as we like to call it) you’ll find that there are little-to-no regulations keeping these dangerous loans in check. And even the regulations that do exist come with loopholes that allow these predatory lenders to basically do whatever they want—at your expense. Read our “Texas Payday Loans: Subprime Report” for more details in the situation in Texas.

Due to the high likelihood of borrowers getting stuck in a cycle of debt, some states now enforce laws to prevent such practices. Some cap the amount of interest a lender can charge, while others may set a maximum loan amount or minimum repayment period. But if you live in Texas you’ll find that there are little-to-no regulations keeping these dangerous loans in check.

Why are title loans so dangerous?

In order to understand how dire the situation in Texas is, you’ll first want to have a firm understanding of exactly what a title loan is and how it works. A title loan is a short-term, high-cost, secured loan that uses your vehicle as collateral. The process for getting one is fairly simple if you own a car. You’ll be required to offer your vehicle title to the lender in exchange for the loan. The lender will then assess your car, truck, SUV, or motorcycle and offer you cash based on a fraction of what the vehicle is worth. Usually borrowers receive about 25-50% of the value of their vehicle, and the loan is due back within about 30 days. Because of the short repayment period and high rates and fees, it’s not out of the question to see triple-digit APRs for title loans.[2]

This is dangerous because repaying a large amount of money in only 30 days can be difficult. And if you aren’t able to pay off the loan you may encounter one of two things. First, the lender may choose to extend the loan to give you more time to pay, but will charge you additional fees and interest to do so. The second possibility is that the lender will take your vehicle away and sell it through a process called reposession.

Title loans are dangerous no matter where you live. Not only are you risking the loss of your vehicle, but you’ll undoubtedly be repaying a lot more than you initially borrowed. This is why many states have chosen to enforce laws that restrict or regulate auto title loans. So why is Texas so far behind?

What makes Texas different?

The law in Texas says that title lenders can’t charge more than 10% interest. That would be great—if that’s actually what happened. The law also states that there’s no cap on the amount of additional fees lenders can charge.[3] In Texas you’ll likely end up paying about $23 for every $100 borrowed. These high fees combined with the interest rate mean unsuspecting borrowers may be stuck with an APR (Annual Percentage Rate) upwards of 500%.[4] So how does this happen despite the 10% law? Good question.

Texas auto title lenders are actively exploiting a loophole in order to charge whatever they want. Title lenders are registering themselves as Credit Access Businesses, which is basically a middle man between the consumer and the company offering the loan. Sadly, there are no regulations on how much CABs can charge. Once a title lender is registered as one, they can charge whatever interest and fees they want as long as the third party that’s providing the loan only charges 10%.[3] Needless to say, this is pretty shady.

Auto title and payday lending is a $4 billion-a-year industry in Texas that preys on families and individuals struggling to get by.[5] They’re filling their pockets by hurting the Texas residents that need help the most. Within the first three quarters of 2014, payday and title lenders had repossessed over 32,100 vehicles from Texas residents.[6]

Auto title and payday lending is a $4 billion-a-year industry in Texas that preys on families and individuals struggling to get by.

Ann Baddour, Director of the Fair Financial Services Program for Texas Appleseed (an Austin group that advocates for those in poverty) said it best in a 2014 New York Times article: “Losing a vehicle, for a family that’s living very close financially to the edge, it’s devastating to people. They can’t get to work; they can’t take the kids to school; they can’t go to doctor’s appointments.”[5]

Texas is one of a handful of states where lenders can get away with this behavior. Title loans there cost borrowers about twice as much as they do in other states. These loans prey on the hardworking, struggling individuals and families throughout the state. There needs to be more protection for these people from the greedy and destructive nature of these companies.

This lack of care and protection for Texas residents has caught the eye of the Consumer Financial Protection Bureau, who said as of 2015 that they are on the edge of new regulations that would cut into the profits of the $46 billion title loan and payday loan industry.[5] This will undoubtedly come as good news for the hardworking people of Texas.

How to stay safe

But what can you do in the meantime to make sure you’re equipped to spot and avoid these dangerous loan products? Well the first step is knowing what to watch out for. With title loans it’s pretty simple: If the lender is asking for your title as collateral for a short-term, cash loan, then you should consider other options.

Another thing to watch out for—whether it’s a title or payday loan—would be deceptive behavior. Make sure any lender you’re dealing with discloses the actual interest rate in terms of APR. This is the amount of interest you would pay if you had the loan for an entire calendar year. It’s a clearer indication of how much you’re actually going to pay for borrowing. It’s different than the monthly interest rate because APR includes any and all additional fees and charges. If the lender is focusing on the monthly interest rate, it may be because they don’t want to show you the APR, as it will be significantly higher.

It all comes down to reading the fine print. Even if you think the lender is legitimate, you always need to read the details and know the terms of the loan. Make the lender explain every single fee, additional charge, and the interest rate. Don’t ever sign anything without knowing the monthly interest, the APR, the length of the repayment term, and all the additional fees—No matter how much they rush you or pressure you. And if you’re dealing with a predatory lender, they most certainly will.

If you want to take it a step further from just protecting yourself from the perils of predatory lenders, there are actions you can take. While there are certain cities in Texas that have passed regulations to curb this dangerous practice, there are still many that have not. You can make a difference by reaching out to your local and federal legislators to tell them how important and pressing this issue is. Find the contact info you need at Texas Legislature Online. Contact your senators, legislators, and other representatives. It’s important that they see how the lack of rules and regulations for these companies affect the people of Texas. (If you have more questions or concerns, or you’d like to learn more about lending in Texas, contact the Texas Fair Lending Alliance.)

One alternative to dangerous title loans, is a safe personal installment loan from OppLoans. Our unsecured loans come with longer terms, lower rates and you’ll never be in danger of losing your car. You can get a quick decision today by clicking “Apply Online” below.

One alternative to dangerous title loans, is a safe personal installment loan from OppLoans.

Why OppLoans

OppLoans is the nation’s leading socially-responsible online lender and one of the fastest-growing organizations in the FinTech space today. Embracing a character-driven approach to modern finance, we emphatically believe all borrowers deserve a dignified alternative to payday lending. Currently rated 5/5 stars on Google and LendingTree, OppLoans is redefining online lending through caring service for our customers.

References

  1. Cafiero Giusti, Autumn. “The consumer perils of a car title loan.” BankRate.com. October 29, 2013. Accessed May 26, 2016. BankRate.com
  2. Neiger, Christopher. “Why car title loans are a bad idea.” Cnn.com. October 8, 2008. Accessed May 26, 2016. CNN.com
  3. “Car-Title Loan Regulation.” ConsumerFed.org. December, 2012. Accessed May 26, 2016. ConsumerFed.org
  4. “FAQs” Texas Fair Lending Alliance. 2013. Accessed May 26, 2016. TexasFairLending.org
  5. Maclaggan, Corrie. “Thousands in Texas Lose Cars Amid Calls for Loan Restrictions” The New York Times. August 23, 2014. Accessed May 27, 2016. NYTimes.com
  6. Berard, Yamil. “The Debt Trap: Texans taken for a ride by auto-title loans” Star-Telegram. February 14, 2015. Accessed May 27, 2016. Star-Telegram.com
  7. Texas Payday Loans: Subprime Report