5 Need-to-Know Facts About Title Loans

If you’ve ever tried to sell your car, you may have had that dark moment when you realize how much your vehicle is actually worth. (Spoiler alert: it’s way less than you might have thought!) But even if your ’92 Geo Prism with the sweet hatchback isn’t exactly a goldmine, you could still use that car to get a pretty sizeable loan if you’re strapped for cash.

This is a major part of why car title loans seem so appealing: In exchange for handing over your car title as collateral, you can get a loan regardless of your credit score. Sounds like a great deal!

Only it’s not really a great deal. If you’re thinking about taking out a title loan to cover either emergency expenses or just everyday costs, these five surprising facts might make you reconsider!

1. Title Loans are banned in 25 states

That’s half the country, folks. Due to their short terms, lump sum repayments and high Annual Percentage Rates (APRs), title lenders are only able to operate in a handful of states.^[1] And many of these states take a, shall we say, lax approach towards regulating these predatory lenders. This makes taking out a loan from one even more dangerous. So if you’re thinking about a title loan, consider that 50% of states have said “thanks, but no thanks” to title lenders.

2. Title Loans have an average APR of 300%

A loan’s Annual Percentage Rate, or APR, measures how much that loan would cost the borrower if it were outstanding for a full year. And with an average APR of 300%, your typical title loan would cost three times what you originally borrowed in fees and interest alone. Technically, these loans are only a month long, with a 25% monthly interest rate, but lots of people can’t afford that. Since they can’t pay their loan back on time, they keep rolling the loan over, scoring another month in exchange for an additional 25%. Before you know it, one month has turned in 12, and that 300% APR is now a reality!

3. Sometimes, a “Title Loan” isn’t actually a Title Loan

Cases like these have been reported in states like Missouri^[2] and Virginia, both of which allow title loans. Customers took out what they thought was a title loan, but was actually something far different. These loans can come with different names, like “consumer installment loan” or “consumer finance loan” but they come with even less regulations than title loans. They can be structured to last much longer than a conventional title loan with potentially unlimited interest.^[3] Offering loans under a different statute is a classic trick by predatory lenders to skirt around state lending regulations. Don’t fall for it.

4. Over 80% of Title Loans are the result of refinancing

The majority of title loans may be short-term loans, but that doesn’t mean that lenders intend them for short-term use. According to a study published by the Consumer Financial Protection Bureau (CFPB) in May, 2016, over 80% of title loans are the result rollover.^[4] What does that mean? It means that the title loan industry doesn’t just profit from their customers’ inability to afford their loans, they depend on it. Short-term title loans aren’t designed to be paid off in a series of small, manageable payments: They are meant to be repaid in a single lump sum. Many customers can’t afford to pay their loan off all at once, meaning they have to refinance the loan just to keep from defaulting and losing their vehicle. Speaking of which …

5. 1 in 5 Title Loan customers loses their car

When a customer cannot pay their title loan back, the lender gets to repossess their vehicle. And according to that same study from the CFPB, this is exactly what happens to one out of every five title loan customers. That’s 20%. If someone told you that a loan came with a 20% chance of losing your car, would you still sign the agreement? Probably not!

References:

1. Bourke, N., Horowitz, A., Karpekina, O., Kravitz, G., Roche, T. “Auto Title Loans: Market practices and borrowers’ experiences.” Retrieved September 12, 2016, from https://www.pewtrusts.org/~/media/assets/2015/03/autotitleloansreport.pdf?la=en
2. Moskop, W. “TitleMax is thriving in Missouri — and repossessing thousands of cars in the process.” Retrieved September 12 from https://www.stltoday.com/business/local/titlemax-is-thriving-in-missouri-and-repossessing-thousands-of-cars/article_d8ea72b3-f687-5be4-8172-9d537ac94123.html
3. Pope, M. “The Fast-Cash World of Virginia Car-Title Lenders.” Retrieved September 12, 2016, from https://wamu.org/story/15/10/05/inside_the_fast_cash_world_of_virginia_car_title_lenders/
4. “Single-Payment Vehicle Title Lending.” Retrieved September 12, 2016, from  https://files.consumerfinance.gov/f/documents/201605_cfpb_single-payment-vehicle-title-lending.pdf