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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.”

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