Unwary customers are falling victim to an increase in vehicle title lenders.
A new money source is being offered to people short on cash: their driveways.
Short-term lenders push borrowers who use their debt-free vehicles as collateral for short-term loans to borrow more money than they typically require.
The number of “car title loans,” which are essentially home equity loans secured by a vehicle, has skyrocketed in states like California and 24, where laws have been loose.
Their high-interest rates and expensive principles provide a new way for people to become trapped in a debt cycle. One in nine borrowers have their automobiles repossessed after the term ConsolidationNow.
Consumers for Auto Reliability and Safety president Rosemary Shahan described title loans as “legalized auto theft” when asked about the practice. To lure you into a cycle of debt where you have to pay off the loan in full over time, they’ll steal your automobile.
Fortunately for Jennifer Jordan, a legal snafu saved her from financial ruin in the Central Valley hamlet of Lemoore, Calif.
When Jordan’s mother died, the 58-year-old claimed she needed roughly $400 to pay for cable TV and other bills stacking up.
A growing number of storefront title lenders, such as Allied Cash Advance, guarantee to assist you in “obtaining the cash you need quickly.” So she went to them for aid.
However, Jordan said that it would not lend a modest amount of money. Instead, it agreed to loan her $2,600 in exchange for her security, a 2005 Buick Rendezvous sport utility vehicle, at an annual interest rate of 153%.
It’s hard to see why the corporation would give her more money than she needs. Because California does not restrict interest rates on consumer loans of more than $2,500 and does not regulate vehicle title loans, this is the main reason.
That employee who loaned Jordan money in 2012 “never mentioned interest or anything like that,” Jordan claimed.
Jordan was woken at 5 a.m. six months later because she could not make her loan payments.
“They’re taking your vehicle!” my neighbor yelled as he pounded on my door,” she remembered.
Data collected over the last four years shows that vehicle title lending is rising as a recent trend.
According to the most recent statistics available, auto title loans in California increased from 64,585 in 2012 to 91,505 in 2013, up from 38,148 in 2011, the first year that the state Department of Business Oversight had been tracking the practice.
Pew Charitable Trusts issued research in March that found more than 2 million individuals in the United States take out vehicle title loans annually.
A thorough look at the problem discovered that an average loan was $1,000, and a regular borrower spent $1200 annually in fees on top of the loan amount.
Pew, which questioned borrowers and examined regulatory data and corporate filings, the most typical annual percentage rate on a one-month loan was 300 percent.
At its 1,350 sites in 16 states, TitleMax Inc. claims to make 2,500 loans a day.
According to the TitleMax website, a vehicle title loan may put up to $10,000 in your bank account in as little as 30 minutes and help you get your life back on track.
It was so alarming to state authorities that they publicly urged customers in December that borrowing against a car should only be used as a “last option” after the number of more popular payday loans had leveled off.
Many people’s sole asset is their car. Jan Lynn Owen, the state’s commissioner of corporate monitoring, warns, “Be cautious signing away that car’s ownership for some short-term cash.”
To ensure that lenders are correctly reporting the conditions of vehicle title loans, the state has begun concentrating regulatory attention on them, she added.
The Department of Financial Institutions took the initial move toward terminating Car Capital Financial Inc.’s lending license in February. According to the state office that investigates consumer complaints, the Orange County title lender reportedly overstated interest rates and financing costs and incorrectly indicated late fees on numerous loans.
The company’s owner, Gary Rhodes, said that the state was relying on “poor information” and expressed his optimism that the disagreement might be resolved at a pending hearing.
Auto title loans are becoming more popular among customers, especially those with poor credit.
They likely have no choice except to pawn their automobile, which would leave them in a worse financial situation. “It’s not a horrible idea for folks to utilize it as a bridge loan to get them over the hump and pay it back.”
Title loans include a broad range of terms that vary from state to state. But they all revolve around the use of the pink slip, or the vehicle’s title, as collateral. To qualify for a car loan, the borrower often has to own the car outright and have a value exceeding the loan balance.
A 30-day grace period may be required in certain areas before the loan must be returned in full, including costs. California is one state that allows the loan to be paid back over time.
When a loan is secured by a car, lenders are less concerned about the borrower’s financial situation. If the borrower does not keep up with their payments, the automobile will be repossessed and auctioned to pay off the debt.
Title loans are booming in California because of a legal loophole.
There is a maximum fee of $45 that may be charged on payday loans in your state. For consumer loans under $2,500, California has a sliding scale interest rate limit that averages roughly 30 percent. There is no interest rate cap on consumer loans over $2,500.
As a result, according to the state’s business supervision agency, almost all vehicle title loans are over this amount. Most are in the $2,500-$5,000 range. According to 2013 state statistics, roughly 45 percent of them had at least 100 percent yearly percentage rates.
Even while it would alleviate their immediate financial need, Owen cautioned that it might kick-start a debt cycle for the company.
These are comparable to the more common payday loans in that respect. Payday lenders are available in 35 states, including California, and Pew estimates that 12 million people utilize them each year.
As the Great Recession wore on, authorities began to take notice of the growing popularity of payday loans. Arizona, Ohio, Virginia, and other states but not California enacted stricter regulations or outright bans on the loans at the request of consumer activists.
Regulators were alerted when certain lending institutions began offering car title loans.
CFPB suggested new regulations for payday and vehicle title lenders back in March. Consumer activists, on the other hand, said that the new rules were more focused on payday loans.
According to Owen, auto title loans in California should be subject to an interest rate restriction.
Ex-Assemblyman Roger Dickinson (D-Sacramento) supported legislation in 2011 that would have restricted interest rates on vehicle title loans at 36 percent, but auto title lenders scuttled the measure.
Dickinson’s Banking and Finance Committee, which he headed at the time, rejected a watered-down version that abolished the restriction but still required lenders to analyze the borrower’s repayment capacity.
He added that auto title lenders have well-known and powerful lobbyists, and they’re typically involved in politics. To put it another way, “They know how to win.”
There are no rules or limitations on vehicle title loans because the California Legislature “doesn’t seem to have the stomach” for it, says consumer protection attorney William Krieg.
When people come to him saying vehicle title lenders ripped them off, Krieg says he only accepts a small number of cases because they are so tough to win.
According to him, the situation of Jennifer Jordan was unique.
Jordan asked Allied Cash Advance if they could give her less than $2,600, but they claimed they couldn’t lend her less than $2,600. Krieg said that she could if she waited 24 hours after she was told she could.
After two days, she paid back $1000, but Krieg claims that only $668 of it was transferred to the loan balance. In light of Jordan’s $900-a-month disability payments, the corporation should have known that a $345-a-month payment on a vehicle title loan would be too much for her to handle, she argued.
In Jordan’s experience, she was never once questioned about her salary.
There was no response from Allied Cash Advance to emails or phone calls seeking comment.
In Krieg’s opinion, Jordan had a lucky streak going. The employee who loaned Jordan the money neglected to get Jordan to sign a typical arbitration agreement form. According to Krieg, Jordan might sue and perhaps bring a class-action antitrust suit.
Jordan’s car will be returned to him by Allied Cash Advance.
He claimed to be “one of the fortunate ones,” Jordan stated. In the words of my pal, “My friend, he lost his automobile.”