WASHINGTON (7/23/13)--Car-title loans have ballooned into a $6 billion dollar industry over the past decade, with $4 billion coming directly from borrowers in the form of exorbitant fees. Twenty-one states still permit this debt-trap, which puts one of consumers' most significant assets on the line (Center for Responsible Lending
Here's how they work. Similar to the subprime mortgage loans made at the height of the mortgage bubble, car-title lenders make asset-based loans without evaluating whether the borrower can repay the loan. The decision is made instead on the value of the collateral--in this case, the car. Typically there's no credit check, nor does the lender ask about other monthly expenses or debts. If the borrower can't make the payment, there are two choices: Get another loan, or lose the car to repossession.
Many borrowers end up in a cycle of debt. One recent study estimates that borrowers who take out the typical nine title loans in a year wind up paying back more than three times the amount borrowed--$3,391 in payments for a $1,042 loan.
The Washington Post
(July 15) reports that, in Virginia, car-title loans in 2012 were up about 26% from 2011, and 20% of borrowers failed to make a monthly payment on a title loan for at least 60 days.
The Center for Responsible Lending cites several borrower stories, one involving a retiree who depleted his life savings to pay for his wife's cancer treatments; he then took out a 375% Annual Percentage Rate (APR) title loan on his pickup truck. His fixed income only covered the title-loan fees, not the principal. He ultimately retired the debt by taking out a loan at 16% APR through a credit union.
Keep these tips in mind before giving away your vehicle:
Zone in on the APR. Car-title loan rates range from 84% to 300% and higher. Focusing only on that "small and easy" initial fee traps many people into an endless cycle of debt.
Shop around. Ask at the credit union what other options are available for your situation.
Steer clear of all predatory loans. That includes refund anticipation loans and overdraft loans. Ask about credit union alternatives to expensive loans offered by payday lenders.
Boost your rainy day account. Consider automatic transfers from checking to a liquid savings account for greater peace of mind.
For more information, watch "Tough Times Series: Avoid Payday Lenders" in the Home & Family Finance Resource Center.