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Archive for September, 2013

Costly Auto-Title Loans Highly Risky for Borrowers Who Are Short on Cash

The Sacramento Bee reports of Shanell White, 38, who took out a $3,900 auto-title loan four years ago. The 36-month loan carried an annual percentage rate of 79.9 percent and finance charges of more than $6,000.

A legal guardian for her niece and a state employee in California, White needed cash to make ends meet with a $300 monthly day care fee, infant care essentials, rent, and replacement parts for her 12-year old Lexus SUV.

She had poor credit and no savings. She couldn’t qualify for a bank loan and had almost exhausted her paycheck.

When White’s repayments were finally almost over, she was shocked to know she still owed more than $3,000 despite having paid more than $11,000; $1,100 repossession fees; interest; and penalties. She declined to pay, allowing her car to be repossessed again, and decided to sue the lender.

A Growing Number

California is one of the few states that allow auto-title loans. There are now a growing number of title lenders in the state charging high interest rates to those who are desperate for cash.

According to California Department of Business Oversight (DBO), almost 100 companies are licensed to issue auto-title loans in several locations in the state. The number grew by 35 percent last year to 80 from 59 in 2011. There are another 19 licensed title lenders so far this year.

Californian borrowers took out more than 38,000 title loans with each amounting to $3,500 on average, DBO’s 2011 data shows.

‘Outright Predatory Lending’

Auto-title loans sport of catchy website names and sales pitch like “get fast cash” and “bad credit and bankruptcy no problem.”

The borrower’s vehicle serves as collateral. So when the borrower fails to pay, the car gets repossessed by the lender.

A consumer attorney in San Francisco, who handled a few cases involving auto-title loans, including White’s, told The Sacramento Bee that auto-title loans are “outright predatory lending.”

Auto-title lenders counter to say that they are “providing a needed consumer service, offering cash loans to people with no other options because of poor credit or no access to traditional bank loans.” They also say charging of high interest rates is necessary due to the loans’ risky nature.

Seeking to Cap

Consumer groups, in joined efforts with state regulators, have been seeking to cap the triple-digit interest rates charged by title lenders or totally abolish the said loans.

Interest rates on consumer loans below $2,500 are capped at 30 percent in California. But interest rates on loans above the said amount do not have any limit, which critics believe has boosted the title lending business in the state.

Two years ago, California Assemblyman Roger Dickinson drafted a bill regulating auto-title loans and capping the interest rate at 36 percent. However, the bill died last year as it faced opposition.

Dickinson told The Sacramento Bee that there is little appetite for interest rate ceilings in the Legislature.

There are only 21 states in the country that allow issuance of auto-title loans. Some states have already capped the interest rates.

Last Resort

Auto title loan opponents advise consumers to only use the loans as last resort. They say cash-strapped individuals can try borrowing from relatives, family members and friends first instead of taking out a title loan right away. Consumers can also get help from credit counselors or trade in their old vehicle to acquire some cash.

According to The Sacramento Bee, White is now raising her own child and has learned an important lesson from the title-loan experience.

She said, “I do want other people in my situation to know there are consequences to taking out an auto title loan. It’s not a good loan for anybody.”



What Every Car Buyer Should Know About Dealership Financing

A lot of car dealerships are advertising zero-percent financing, no money down, and unbelievably low interest rates. Such offers are enticing as they make you think, as a car shopper, that financing programs offered by car companies are the best deals you can get. But how do dealers really do car financing?

Indirect Financing and Dealer Markup

When a car shopper opts to finance a car in a dealership, the latter facilitates the loan process through a third-party lender. This is called indirect financing.

In indirect financing, the dealer acts as the middleman between you and the lender. And in the process, the dealer marks up the interest rate given by the lender to make more money from the service. This is called dealer markup. It isn’t illegal for dealers to mark up the interest rate, but some states do cap the increase.

The Impact of Dealer Markup

In any case, dealer markup significantly affects the overall cost of the car purchase. With it, the interest rate becomes less dependent on your creditworthiness. Even if you have an excellent credit, you could still get a higher interest rate than what you’re only supposed to get because of the markup. This can cost you several thousand dollars over the life of the loan.


Moreover, car dealers often add extra costs to the auto loan. These usually come in the form of unnecessary services, extended warranties, insurance, and the like. You don’t have to purchase these from them right away. Read the paperwork carefully and opt out of the products and services you don’t need at the moment.

How to Avoid Overpaying for Your Car

There are several ways on how you can avoid overspending for your car when you choose to finance with a dealership. One, research the available auto loan rates in your area. If you have a less-than-excellent credit, you will not be able to qualify for the best rates. But doing some research will certainly give you an idea of how much interest rate you could get.

And two, get a copy of your credit report and purchase your credit score. It is important to come well-prepared into a dealership. Know your credit situation well before letting dealerships take a look at it. If there is any inaccuracy in your credit report, have the reporting agency fix it and make the necessary adjustments. s



Where Can the Cheapest Auto Loans be Found?

Michigan and Rhode Island is the best and worst states, respectively, to finance a new car, rankings by show., an online consumer financial resource, studied the base interest rates on every new-car loan in the U.S. The rankings came after computing for the aggregate average loan rate for each state using the statewide average rate.

Michigan, where the auto industry is markedly thriving, is crowned the best state to finance a new car with 3.03 percent aggregate average loan rate.

Along with Michigan, here are other states where consumers can find the lowest new-auto loan rates:

1. Michigan (3.03%)
2. Oregon (3.04%)
3. Alaska (3.04%)
4. New Hampshire (3.08%)
5. South Carolina (3.15%)
6. Vermont (3.17%)
7. Oklahoma (3.23%)
8. Utah (3.28%)
9. Washington (3.29%)
10. North Carolina (3.31%)

Meanwhile, Rhode Island is named the worst state to finance a new car as it possesses the highest aggregate average loan rate of 5.11 percent.

Here is the complete list of top 10 states with the highest new-car loan rates:

1. Rhode Island (5.11%)
2. Connecticut (4.82%)
3. New Jersey (4.47%)
4. Massachusetts (4.21%)
5. Louisiana (4.20%)
6. West Virginia (4.16%)
7. Delaware (4.14%)
8. Washington DC (3.95%)
9. Mississippi (3.91%)
10. Pennsylvania (3.84%) also identified some lenders in each state where consumers can find the lowest possible interest rates for new cars.

In Michigan, borrowers can find the lowest rates in Community West Credit Union, Navy Federal Credit Union and Michigan Educational Credit Union.

Meanwhile, new-auto loan seekers in Rhode Island can still get low interest rates in USAA FSB and Navy Federal Credit Union despite their state being the worst place to finance a new car.

Latest Experian data shows that the average rate on new cars in the U.S. is 4.46 percent in the second quarter of this year. It is lower than last year’s average of 4.63 percent.



Wider Auto Loan Program for High-Tech Cars Faces Opposition

Republicans in Congress are opposing the Democrats’ plan to expand the Department of Energy’s loan program for high-tech cars.

Reuters reports that the DOE was planning “an active outreach campaign” for their Advanced Technology Vehicle Manufacturing (ATVM) loan program, which was created six years ago for the development of electric and hybrid cars.

The DOE said it still has $15 billion that can be loaned to qualified applicants. Currently, only manufacturers of light passenger vehicles and their components are eligible for the ATVM loan program.

Two Democratic senators, Debbie Stabenow and Senate Energy Committee Chairman Ron Wyden, have drafted a bill allowing component manufacturers in the supply chain and making builders of medium and heavy duty trucks and buses eligible for the loan program.

The department promised funding five companies, including Ford Motor Co., Nissan and Tesla, with over $8 billion between 2009 and 2011. However, the program’s failures are remembered more than its accomplishments.


The DOE is “operating with a limited amount of financial tools,” a policy adviser for the clean energy program of think tank Third Way told Reuters.

The agency’s slow and incomprehensible loan process discouraged some companies. Chrysler Group LLC, for example, gave up their loan application and pursued other options.

The Third Way adviser said it would be better to expand the program to heavy duty automakers and the construction of fueling infrastructures for advanced automobiles.

The head of the House oversight committee, Darell Issa, said that the ATVM loan program was a “perfect example of government waste,” Reuters reports.

The program threw good American tax payers’ hard-earned money into projects that were not necessary or did not actually help develop vehicles with advanced technology, he added.



Banks Lend More to Subprime Borrowers as Auto Loan Delinquencies Drop

Banks are giving more car loans to high-risk borrowers as auto loan delinquencies drop and automakers’ finance units make more loans to more creditworthy borrowers, data shows.

According to credit tracker Experian Plc, about 36 percent of the loans originated by U.S. banks went to subprime borrowers in the second quarter of this year, up from 34 percent last year.

U.S. banks moved down the credit scale as competition got stronger. The market share of auto manufacturers’ financing arms jumped seven points to 25 percent last year. The banks’ share fell four points to 36 percent.

The third largest type of auto lender, credit unions, became slightly weaker with a two-point decrease to 15 percent.

Automakers’ finance subsidiaries made about 74 percent of their loans to prime borrowers.

The changes in lenders’ behavior came as new-car loans declined for four consecutive years. Lending standards were tight especially in 2009 during the economic recession when banks and automakers needed to conserve capital.

Meanwhile, the rate of 30-day delinquent car loans went down to 2.38 percent, the lowest of all the second-quarter rates since 2006, Experian’s latest report shows.

Repossession rate settled at a record low of 0.36 percent in the second quarter.

However, banks seem to have mixed feelings about the shifts. Low delinquency rate means reduced loan origination costs. But making loans to high-risk borrowers require higher costs.

For example, lenders were willing to take more risk, extending loan terms up to six to seven years, in almost 20 percent of new car loans, while the average loan term for new cars this year went up by one month to 65 months.



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