Sometimes desperate times call for desperate measures. But times must be desperate indeed if you have to pay triple-digit interest rates for a small, short-term loan, particularly when it means risking the loss of your car.
Unfortunately, a growing number of New Jerseyans who find themselves in a financial bind are turning to car title loans, a source for quick money that could end up costing them their vehicle, often the most valuable thing they own.
Title loans are marketed as small emergency loans, with the customer handing over his or her car title and an extra set of keys as collateral. A typical car title loan has a triple-digit annual interest rate, requires payment within one month and is for much less than the value of the car.
“Title loans trap borrowers in perpetual debt through unaffordable balloon payments, high interest costs and the threat of repossession”.
Car title lenders generally require prospective borrowers to have free and clear title to the car before giving a loan. The lender then decides how much the consumer can borrow, based on the vehicle’s value. The loan-to-value ratio is rarely greater than 33 percent, making it a win-win situation for the lender if the borrower defaults.
Title loans usually carry an interest rate of about 25 percent for 30 days. And, if you can’t pay off the loan at the end of 30 days, it will roll over with the same interest rate. That works out to about 300 percent annually. A $500 loan on the first of the month turns into a $625 debt at the end of the month.
The possible loss of your car makes these loans dangerous. “If you lose your car, everything else just cascades”. “You can’t access your job or health care and, therefore, you fall behind on other bills, and it makes life almost impossible.”
Car title lending was introduced in the early 1990s as an alternative to payday loans and has been growing rapidly, according to a study by the Center for Responsible Spending and the Consumer Federation of America. The recently released study indicates that, while some states have started to pass laws protecting borrowers from predatory lending practices by placing restrictions on repossessions and capping interest rates, many states have no title lending laws.
It’s estimated that there are currently more than 15,000 title loan shops in the United States.
“We feel that if states allow this type of lending then they need to regulate it much better,” says Amy Q, policy and litigation counsel for the Center for Responsible Lending. “There is a lot of variety from state to state regarding title lending. However, I think title lenders have been operating below the radar and lobbying for special treatment and exploited loopholes.”
The credit industry has a very strong lobby everywhere, and most consumer advocates say it will be tough to get something accomplished unless more politicians are involved.
With no laws in place, you will find uncapped interest rates, some as high as 1200 percent.