The Auto Title Loan has roots in the pawnbroking industry. As most people know, to obtain a pawn loan, you must hand over something of value (say, a TV or Playstation) to the pawnbroker as collateral on the money loaned to you. You have a certain amount of time to repay the loan or you forfeit the collateral. Upon forfeit, the pawnbroker will sell the collateral to cover the loan. The collateral could be any property the borrower owned that had any value.
One of the most valuable pieces of property an individual owns is their automobile. But how could a pawnbroker make a loan on a car? In normal circumstances, the property used as collateral is kept by the pawnbroker to assure repayment of the loan. This just would not work on a car. First, the vehicle is used on a daily basis by the borrower to get groceries, to go to work, to bring the kids to school, and is an integral part of the very freedom most people enjoy. Surely the borrower would not part with the second biggest financial investment most will make in their lifetime. Second, the cost of insurance, storage and other costs to the pawnbroker would be prohibitively expensive. So what is a pawnbroker to do?
How the Auto Title Loan Works.
When a vehicle is paid for or the terms of the loan are satisfied, the title to the vehicle is released from the lender to the borrower. The borrower becomes the true owner of the vehicle.
The pawnbroker knows that if someone comes into his establishment with a title and is willing to sign it over to the pawnbroker, the vehicle does not have to physically be on the pawnbrokers property to secure the loan. The vehicle is not the collateral; the title to the vehicle is the actual collateral on the loan. Pay off the loan and the pawnbroker will return the title back to you. Default on the loan and the pawnbroker can collect and eventually sell what has become his property. Typically, a credit check is not performed and a door and ignition key is given to the lender in addition to the actual title.
An Auto Title Loan is a short-term loan, typically payable within 30 to 60 days after the paperwork is signed. The original loan amount is typically 25% of the book value of the vehicle. Certain vehicles (those that are considered luxury or which can easily be resold) may command up to 50% of their value as the loan amount. Interest rates are approximately 25% per month and vary locally and state by state. The borrower will usually pay additional loan processing fees of $25.00 or more. Annual interest rates vary widely and depend on the amount of fees and extras built into the loan. Typical rates run from 25% to 650% annually. Additional profit makers include mandatory service club enrolment, mandatory mechanical warranties, and other products.
Because the Auto Title Loan is a short term loan or what others would call a payday or emergency loan, borrowers are expected to pay off the loan quickly. The terms of the loan lock in the borrower and create an atmosphere of a never ending circle of debt.
If the borrower can't pay off the loan on time, the borrower must renew or roll over the loan. In this circumstance, most borrowers will simply pay the interest and attempt to satisfy the new amount the next month. Unfortunately for the borrower, this renewal of the loan creates more fees and more interest. Down the road, this usually results in huge unaffordable payments that can not be made by the borrower.
In many contracts, the pawnbroker may set a limit on how many renewals a borrower may make before the loan is considered in default. This prevents the amount owed from exceeding the value of the vehicle. The term calling the loan is sometimes used to describe the lender's demand for final full payment. Calling the loan is also a term used to describe the final date that all monies must be paid back to the lender or face the loss of the vehicle.
In one instance, a gentleman took an Auto Title Loan in the amount of $1,700.00 on a vehicle valued at $6,000.00. Because of circumstances beyond his control, he could not satisfy the loan. Because of repeated renewals, he eventually paid over $7,400.00 in interest alone. When the pawnbroker finally called the loan and demanded (per the contract stipulations) final payment, the gentleman had to pay and additional $2,070.00. In another case, a gentleman took out a $1,500.00 Auto Title Loan. Over the next 18 months, he made over $5,000.00 in interest payment without paying anything to the principal.
Not only does the borrower forfeit the family sedan upon default, they owe even more money afterwards. Once the vehicle has been repossessed, the borrower may be responsible for the cost of repossession and sale of the vehicle, attorney fees and court costs, along with the outstanding balance of the original loan.
Do Auto Title Loan Companies Target Certain Areas?
The Center for Responsible Lending & the Consumer Federation of America release a report in 2005 titled "Driven Into Debt: CFA Car Title Loan Store and Online Survey". According to the report, 70% of Missouri Auto Title Loan customers earned less than $25,000.00 per year. Illinois Auto Title Loan customers earned less than $20,000.00 per year. New Mexico consumers taking an Auto Title Loan earned less than $21,000.00 per year. Clearly, lower income individuals are the majority of the borrowers. By virtue of their taking this type of last ditch loan, it would appear that these same people are the most at-risk of defaulting on such a loan.
The National Consumer Law Center's report, In Harms Way, noted and increase in the concentration of Auto Title Loan businesses outside Kings Bay Submarine Base in Georgia. This occurred after Florida reformed its title loan law, capping Annual Percentage Rates to 30% interest.
The Virginian-Pilot reported that 50% of the LoanMax stores (who write Auto Title Loans, Payday Loans and other types of sub-prime loans) opened in Virginia were located in Hampton Roads. Hampton Roads just happens to be the home of Navy, Air Force, and Army bases. In addition, at least a dozen Fast Auto Loans offices were in the region by mid-2005.
A Loan By Any Other Name.
In recent years, a few states have enacted caps on loans. Unfortunately, the Auto Title Loan lenders have come up with loopholes that defeat the new laws. The net result is the continued rape of the neediest of consumers. Loopholes include the following loan products.
Sale-Leaseback. The Auto Title Loan lender asserts that the borrower sold the vehicle to the lender. The lender then leases the vehicle back to the borrower at a rate higher than what a normal lender can charge. This is accomplished by monthly fees, mandatory auto club membership dues, etc. The borrower has the option to buy back the vehicle at the end of the lease. If not bought, the vehicle is sold and the proceeds of the sale are retained by the lender.
According to The Consumer Federation of America, a Michigan consumer borrowed $1,500.00 from APLE Auto Cash Express in Southfield, Michigan in a Sale-Leaseback transaction. The consumer agreed to pay $398.00 in two installments and $199.00 in renewal payments every month for another 34 months. To buy back the vehicle, a total of 36 monthly rental payments of $199.00 each, totaling $7,164.00 was required. The borrower signed forms stating that the transaction was not a loan and that the consumer had no equity in the car until fully repaid.
Open-End Credit. Since the deregulation of the credit card industry, some unregulated lenders have written loan products, such as Auto Title Loans, that should be single-payment, low cap loans. Instead, the loan is written as an open-ended credit agreement. This is done because there is currently no cap on interest rates on opened-ended credit agreements in many states.
Balloon Payment Loans. Similar to a Sale-Leaseback, Auto Title Loan lenders are also using a derivative of the home mortgage industry. As most know, a balloon mortgage features a fixed number of monthly payments followed by a large final payment to satisfy the loan. If the consumer can't afford the balloon payment at the end of the term, the consumer may refinance at a higher or lower interest rate and fixed fees.
Unlike home mortgages, a Balloon Auto Title Loan gives the consumer a fixed amount of money and several low monthly payments that cover interest only. Typically, costs and fees for the production of the loan are figured into the fixed amount and in effect, the consumer is also paying interest on the fees.
At the end of the loan, the consumer is expected to pay off the entire loan amount. When the consumer cannot, she is given the option to refinance the balloon payment for another few months. Accordingly, there are now penalties that get tacked on to this new loan for non-payment of the original loan. In addition, new costs and fees are included in this new, bigger loan as well. The result is a slightly larger monthly payment, but an ever-growing balloon payment looming in the future.
What Can a Borrower Do?
1 Consider Your Options. Payday Loans, Auto Title Loans, and Pawn Loans are all part of the sub-prime or fringe lending landscape. While it might not seem on its face to matter, one type of loan is much different from another.
* A-If you have property you can do without (a TV or power tools) a Pawn Loan might get a consumer through a financial pinch. The collateral is lost if a consumer defaults on a debt. Fortunately, the consumer won't be sued and won't face debt that snowballs out of control.
* B-Payday Loan, while loaded with fees and incredibly high interest, may be a viable one-time-only solution provided the consumer is informed. If the loan is defaulted on, there will be the added expense of attorney fees, court costs, dealing with third party debt collectors and negative entries being made on the consumer's credit report. But at least the consumer can still get to work.
* C-An Auto Title Loan should be held as a last resort. Upon default, you can expect to get the same results as is found with a Payday Loan default. Besides that unpleasantness, the consumer can also look forward to loosing what is most likely their most valuable possession. Additionally, the consumer can look forward to the hassle of public transportation or hitching a ride with friends, family and co-workers.
2 Seek out non-profit debt counseling.
3 If a loan is absolutely necessary, seek out a small loan company that lends money according to regulated rates. The consumer will also find that the fine print will usually be spelled out instead of being hidden or written in confusing language.
4 Get a bank account at a small bank or Credit Union. Even having minimal balance history goes a long way in obtaining a small loan if the balance history is long.
What Can Elected Officials Do?
Lawmakers should close the loopholes that Auto Title Loan lenders use to exploit existing laws. Examples are Sale-Leaseback transactions and disguising secured loans as open-ended credit.
Lawmakers should resist the influence of the Auto Title Loan special interest groups and their lobbyists such as The Consumer Lending Alliance.
States that currently authorize high rate lending should repeal those laws or enact rate caps on these types of loans.
Lawmakers should strengthen Consumer Protection Laws of their state. Clearer default procedures and protection of the consumer's property should be written or strengthened as well.
States should make it illegal for a third party debt collection company, or its parent company, to be in the business of making loans of any type. Such ridiculousness can be seen with Anderson Financial Services. AFS also does business as Anderson Financial Network Incorporated (AFNI), a third party debt collector. They also do business as LoanMax and LoanSmart. The loans written by LoanMax and LoanSmart are described by Iowa Attorney General Tom Miller as abusive and unconscionable and feature 360% APR on contracts that offer almost no protection for the consumer.