Over the last year, car title loans have been portrayed as a horrible service in various media outlets, and have been described as predatory by many. But many are now saying that the hysteria about car title loans might be unwarranted and that they might not be as bad as their detractors are making them out to be. But what is the truth about car title loans and is the hysteria warranted?
The Hysteria about Car Title Loans
The standard criticism about car title loans is that failure to repay the loan in time costs someone their car for an amount far less than the vehicle is worth. The narrative is that the person then loses their job due to their inability to get to work. In contrast, payday loans may rollover and be paid back with fees and interest far beyond the original loan amount, but this doesn’t threaten their very livelihood. This narrative is why car title loans have been outlawed in a number of states, including Alaska, Colorado and Kansas.
Vanderbilt University’s Paige Marta Skiba found that this narrative isn’t true. In 2013, the law professor at Vanderbilt found that very few borrowers actually lose a vehicle due to repossession.
The University of Illinois Law Review study “Dude, Where’s My Car Title?” reported that fewer than 10% of vehicles were repossessed.
And fewer than 15% of borrowers said the car was their only way to get to work. Losing the vehicle in these cases creates a major inconvenience, but it didn’t cost people their livelihood. Combining these figures results in around 1.5% of car title borrowers losing their only way to work due to a vehicle repossession, according to Skiba.
What Are Car Title Loans?
Car title loans, also called title pledges, auto title loans or title pawns, are available for up to 50% of the value of the car. In some states, the car title loan can be given if you have equity in the vehicle even if there is an outstanding car loan balance or a clouded title. The loans are for terms of 15 to 30 days. Car title loans can be expensive, with an average 25% per month to finance the loan. The APR for car title loans can hit 300% if renewed month after month, but in reality, that is very rare.
Car title loans are portrayed as a niche industry preying on the weak and ignorant. The reality is that, according to a Pew Charitable Trusts study, more than two million people per year take out car title loans. This number looks low until you realize that half of the U.S. states have outlawed car title loans altogether due to the fear that consumers will be ripped off.
Factors that Drive Up the Cost of a Car Title Loan
Add-ons like a vehicle roadside assistance fee inflate the cost of the loan. Literally compounding matters is the fact that these costs become part of the finance charges of the loan and the interest on these charges accrues.
The interest rate of the loan depends on the jurisdiction where you live and the loan amount. Processing fees are set by law in some states, and the maximum interest rate allowed is often bound by state law. It is common to charge a lower interest rate on a higher value loan, though many states cap the amount that can be loaned against a car title. In states like South Carolina, loan amounts over a set limit go around the legal restrictions that come with smaller car title loans.
Some states limit the loan term, including the number of days the loan can be rolled over. Limits like restricting one car title loan per month and only one per adult are common. These rules help prevent desperate borrowers from pledging both cars or other vehicle, or relying on car title loans excessively.
What’s the Verdict on Car Title Loans?
Car title loans rarely risk someone’s ability to earn a living, though this hysteria is why auto title loans have been more heavily regulated in many states. There are many rules and regulations limiting the interest rates and fees associated with these loans so that the borrower is not taken advantage of. These types of loans are available to anyone with a car they own with significant equity, regardless of credit and their popularity seems to be growing.