Arizona Moves to Ban Title Loans

Inside Subprime: June 4, 2019

By Jessica Easto

A group of Arizona consumer advocates are pushing to either ban title loans or reduce the interest rates lenders are allowed to charge in the Grand Canyon State.

Last month, legal papers were filed in order to move the initiative forward. Backers of the initiative need to collect 237,645 valid signatures from Arizona voters by July 2, 2020, in order for the issue to to appear on the general election ballot in 2020.

Title loans are a type of predatory loan in which borrowers receive quick money in exchange for putting their vehicles up as collateral—meaning, the lender can repossess the car if the debt isn’t repaid. They are often difficult for borrowers to repay due to their short repayment terms and high interest rates.

In Arizona, the legal maximum annual percentage rate (APR) is currently 204 percent. If this new initiative cannot ban title loans outright, it seeks to limit their allowable APR to 36 percent. There have been several legislative proposals to enact this 36 percent cap, but they have all been defeated by Arizona’s Republican-controlled legislature—one reason why, this time, the decision is being taken directly to the voters.

This push is backed by many of the same groups that successfully outlawed payday loans in 2010, making Arizona the seventeenth state to do so. The payday loan industry reportedly spent more than $17 million to prevent this from happening.

Payday loans are very similar to title loans, except they do not require the borrower to put up collateral in order to borrow money. When payday loans were banned, the law still allowed for Arizonans to borrow against their cars.

Since the payday loan ban, reports have shown that title loan lending has greatly increased. Many backers of the title loan ban—including Kelly Griffith of the Southwest Center for Economic Integrity—believe that title loan lenders have stretched the letter of the law to make that happen. Today, for example, people can borrow against cars that they don’t even have clear title to.

“They’re exploiting that loophole,” said Griffith, by offering title loans to borrowers who cannot afford them. “It’s another name for payday loans.”

The risks of payday loans and title loans are the same. Frequently, borrowers who are unable to pay back their original loans take out another one, and another one. The cycle of debt that results can be difficult to get out of and can lead to bankruptcy.

It’s likely that this initiative will be fought by the title loan industry. Those who oppose the ban say that products like title loans offer an option to high-risk individuals that cannot quality for financial products through traditional lenders, like banks, thereby justifying the high interest rates.

However, Griffiths believes that the industry effectively encourages people to borrow when they cannot afford it.

“If you do not have enough income to meet your basic cash flow needs . . . what are the chances you’re going to be able to pay that loan back?” she asked.

Learn more about payday loans, scams, and cash advances by checking out our city and state financial guides, including Arizona, PhoenixMesa and more.