As the average price for new vehicles has placed them beyond the reach of many Americans, more and more consumers are turning to risky title loans as a way to hold on to new vehicles they purchased but couldn’t actually afford.
Car title loans have been called “the home equity loans of subprime auto”, and there is growing fear that they might lead to a collapse similar to the mortgage meltdown.
Title loans can last from as long as two years to as little as 30 days, and require that borrowers turn over their vehicle titles in exchange for loans that typically equal just one percent of their vehicles’ resale value.
The auto title loan business is big, and getting bigger as regulators in a number of states have begun cracking down on payday loan companies. In 2013, more than 1.1 American households used them according to data compiled by the Federal Deposit Insurance Corporation. In all too many cases, borrowers ultimately lose the vehicles they have put up as collateral and find themselves even further in debt.
The New York Times recently reported that fees associated with car title loans, also commonly referred to as “motor-vehicle equity lines of credit,” can result in an effective interest rate of between 80 percent to well over 500 percent. Borrowers who take out short term loans of just 30 days frequently find that they are unable to pay them off, and are forced to pay additional fees when they renew or extend their original loans.
Title loan companies argue that the high interest rates and fees they charge are justified by the risk involved in loaning to borrowers who would not qualify for traditional loans.
Recently, private equity firms have begun investing in title loan companies, and even some larger banks have begun offering auto loans to borrowers with lower credit scores. In fact, some title loan companies do not even take the borrower’s credit history into consideration
Unfortunately, borrowers who resort to title loans are frequently in dire financial straits due to an illness, divorce, job loss or some other financially taxing life change.
According to a study by the Center for Responsible Lending, one in six auto title loan borrowers end up losing their vehicles due to their inability to repay.