For most people, a car paid in full is a sign of financial freedom. When monthly notes are done, household budgets gain the opportunity to redirect monies to savings, a home down payment, retirement investments or other living needs.
That financial relief can be enjoyed – unless vehicle owners take on debt that often leads to repossession: car-title loans. Like other predatory financial products, the lure of easy cash almost always leads to nagging, long-term payments and heavy regrets.
In the newest chapter in the State of Lending research series, the Center for Responsible Lending (CRL) analyzed the debt traps of car-title loans. It's an under-reported financial issue that today affects consumers in 21 states through more than 8,100 retail stores. It's also an industry that annually reaps $4.3 billion in fees on loans totaling $1.9 billion, with an average loan size of only $1,042.
Let's say you find yourself a little short on cash; but have title to your vehicle. A car-title lender is ready however to offer a loan with no questions asked about your credit or other financial obligations. The loan will always be a fraction of the vehicle's full market value. Just sign the loan papers and ready cash of several hundred or even a few thousand dollars is yours.
What car-title lenders seldom mention is that most borrowers are unable to repay the full amount of fees and the loan in just a single payment. The typical borrower takes eight renewals on a single loan and eventually pays $3,391 - over three times the average amount borrowed. Like payday loans, once loan fees are paid, few funds are left for other living needs and a turnstile of debt begins. Worst of all, even if a car-title loan leads to vehicle repossession the borrower must continue to repay all monies still owed even when the borrower has neither title nor use. For example, in 2008, 60 percent of New Mexico car-title borrowers lost their cars to repossession.
And what does the lender get for his money? Let us count the ways:
· Excessive loan fees that frequently total more than the principal borrowed;
· Repossession of your vehicle, made easier by installed GPS trackers;
· An additional loan fee for the repossession itself, typically $350-$450;
· The right to sell the vehicle at market prices --without your notification or the chance to catch up on your loan;
· The right to keep all of the vehicle sales proceeds; and
· The ability to force continued payments on the loan and fees until the full financial obligation is met.
So who borrows these high-cost loans? Typically they are consumers who earn $25,000 or less a year. Further, about half of all car-title borrowers are unbanked. According to FDIC, the federal office that keeps track of the unbanked, the large majority are people of color. FDIC found that more than one in five black households (21.4 percent) are unbanked and one in three (33.9 percent) are under-banked. Similarly, 20 percent of Hispanic households are unbanked and almost 30 percent (28.6 percent) under-banked.
The report's state-by-state analysis found that Texas leads the nation in the number of stores, loans and loan volume with 2,258 stores and 475,681 loans per year valued at half a billion dollars. Tennessee, with a significantly lower population and 837 stores had the second highest loan volume with $254 million but the highest per capita usage. Other states with annual loan volumes exceeding $100 million per year are: Alabama, Arizona, and Virginia.
The report's policy recommendations include:
· Limiting loan interest rates to 36 percent or less and denying lenders exceptions to state usury laws – both state legislative actions;
· Requiring lenders to evaluate a borrower's ability to repay the loan and meet other expenses without taking out a subsequent loan;
· Additionally requiring loan terms to be structured as equal payment installments with reasonable rate limitations; and
· Providing borrowers with:
1. Prior notice of a vehicle sale,
2. The opportunity to redeem their vehicle, and
3. The return of surplus monies from vehicle sales proceeds.
In 2006, President George W. Bush and Congress agreed to cap small loans at 36 percent annually for active duty soldiers. It seems reasonable that the rest of us should be given the same protections.
Charlene Crowell is a communications manager with the Center for Responsible Lending.