Meet the Predators: Title Loans and Title Lenders

Chase


The “title” in “title loan” refers to the auto title that the borrower uses to secure the loan. When applying for a loan, the borrower brings in the physical copy of their auto title and hands it over to the lender, who then either holds onto it or registers a claim against it and gives it back. To receive a title loan, the borrower must own the vehicle free and clear. This means that if you took out an auto loan to buy your car, truck or motorcycle, you could only apply for a title loan once you have paid that auto loan off. (Of course, just because you can apply for a title loan, that doesn’t mean that you should.)

The principal amount for any title loan is going to depend on the value of the vehicle that’s serving as collateral. This means that, first, the lender must inspect the vehicle to determine how much they could possibly sell it for. And even once they’ve determined the vehicle’s maximum value, the amount of the loan principal isn’t going to be anywhere close to that. On average, the typical title loan is only worth 25-50% of the vehicle’s full value. (The average loan amount is a little under $1,000.)5 Already, it’s becoming clear that the terms of the loan are heavily weighted towards the lender.

Once the contract for the loan has been signed, the borrower gets to leave the lender with the cash in their pocket. They also get to keep their car while the loan is outstanding. But that’s where the benefits end. The average length of a title loan is one month and the average interest rate is 25%. 25% might seem high, but it isn’t. Given that it’s a full 25% over a single month, it’s actually super high!

Why Are Title Loans Predatory?

Ask yourself: if you had 30 days to pay back $1,250, would you be able to?

Just like with payday loans, it helps to look at the APR. With an average rate of 25%, the standard title loan has an APR of 300%! That means that if the loan were outstanding for a single year, the borrower would pay three times what they originally borrowed in fees and interest alone!

But with a one-month loan, is the annual cost something that borrowers are going to have to worry about? With title loans, the answer is definitely yes. Many borrowers are unable to pay the loan back in full after only one month. (Ask yourself: if you had 30 days to pay back $1,250, would you be able to?)

Title lenders know this; in fact, they’re counting on it. So, what they do is offer to extend the term by another month as long as the borrower agrees to pay back the fees and interest that they already owe. But it’s not like that extra month is coming free of charge. The borrower still owes an additional 25%. After two months, the borrower is already paying a rate of 50%. In some cases, title loans are outstanding for years, because the people simply cannot afford to pay anything towards the principal.

“Title lenders can seize the vehicle in the event that the borrower cannot repay.”

Because the borrower’s car was used as collateral for the loan, title lenders can seize the vehicle if the borrower cannot repay. This is a process called repossession. The lender then gets to sell the vehicle to recoup their losses. In some states, they don’t even have to pay you the difference if they sell the car for more than you owed. It’s a pretty great deal for them, but it comes at your expense.

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