High-cost car title loans are illegal in most states. That’s because they’re so risky for borrowers, often ruining lives. Particularly when people lose their cars — usually their only way to get to work — and then their jobs.
In 2004, in response to a two-part series of front-page reports by David Lazarus in the San Francisco Chronicle, exposing the seedy but growing car title lending business, California legislators vowed to put a stop to title loans. Fast-forward almost a decade, and what’s changed? Nothing — except the shady, predatory businesses continue to expand and cost more consumers triple-digit interest, and often their vehicles.
How high is the default rate for car title loans? At a hearing before the California Assembly Banking Committee, Oscar Rodriguez, CEO of LoanMart, testified on behalf of the leading trade association for car title lenders operating in California. When asked, point-blank, he admitted that while some lenders have default rates of 14-15%, others have rates up to 40-50%. This is astronomical, and powerful evidence that the loans are predatory — not designed to aid the borrowers, but to strip them of their only valuable material possession — their car.
California caps the interest rate on some loans below $2500. So title lenders skirt the law by talking consumers who seek smaller loans into getting loans over the $2500 threshold. Consumers naturally assume that must mean that they qualify to borrow more, based on their income or creditworthiness. In reality, their credit has nothing to do with the loan amount. As long as the lender can seize their car, and it’s worth much more than the loan, there’s no risk for the lender. Of course, the bigger loan increases the risk for the borrower.
As the Attorney General of Florida warns: “Remember that a title loan is not risky for the lender but it may be very risky for you.” How to protect yourself: title loans
So who benefits from car title lending? Award-winning journalist Gary Rivlin’s portrait of who’s living high off the hog thanks to high-cost loans, including car-title loans:
Portrait of a Subprime Lender
What can you do to avoid the car title lending trap? If at all possible, save up instead of getting a loan. If that’s not possible, find other, less-risky ways to borrow money. Some lower-risk options: Join a credit union. Seek loans from family members. Sell your car and buy a less-expensive one. Usually, you’re much better off selling it yourself than having it repossessed by a car title lender.
Auto-title loans drawing scrutiny — Sacramento Bee, by Personal Finance Columnist Claudia Buck
‘Car-title loans’ a road to deep debt — San Francisco Chronicle, by Business Reporter Carolyn Said
How to protect yourself: title loans — What else can you do in a pinch, that’s less risky? Advice from Florida’s Attorney General