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The Legal Debate Over Title Loans

Much ink has been spilled lately about whether title loans are life-saving options for the times you need fast cash urgently or just a decision that should best be avoided. The debate over title loans seems to be everlasting, with 30 states having outlawed car title loans already and another 16 allowing lenders to operate within their boundaries, even via loopholes. Before anyone jumps to conclusions and either forever ban or warmly embrace the idea of opting for a title loan, here are some facts that should be taken into account first.

What Exactly Are Title Loans?

A car title loan is a short-term loan for a small amount of money. The only thing one needs to do to take out a loan is to have a car, truck or motorcycle in their name. Then, with the vehicle and a government-issued ID, they can freely get some money while handing over the title to their vehicle. This doesn’t mean that you leave the vehicle there. You can still drive it around like you did before. The lender places a lien on your vehicle’s title and releases the lien when the loan is paid in full.

Nobody will ask you if you can actually afford to pay back the loan or what your credit score is like. This is because the lender has every right to repossess your vehicle and sell it, or do anything else they wish with it, if you default on the loan. That being said, you can borrow up to $10,000, with no application fees or credit hassle and get your money in less than 30 minutes.

Car title loans are usually distinguished by a high-interest (typically, 25% a month) and have to be repaid in 30 days or so, although there are lenders that offer more flexible repayment options. For someone in need of some easy money fast, title loans do comprise a good alternative to taking out a loan or maxing out a credit card. Of course, as with every instance when you borrow money, you do need to be very focused on paying it back the soonest possible so that you don’t land in a revolving cycle of debt due to interest or even end up losing your only viable transportation to work or school (with all of your equity in it gone too).

So, although the 25% monthly interest is sky-high, compared to other financial products, it is still payable if you are organized or were just caught up in an emergency at the time you got a title loan and you are now back on your feet again. In any other case, a title loan can easily become a nightmare. Let’s say that you delay repayment and spread it over a year; the APR instantly becomes 300%. This means that you will end up paying back 3X the amount you have borrowed.

How Are Title Loans Regulated?

As of now, around 30 states have decided to outlaw title loans. The reason for it is because of the about 1.7 million people that take out a car title loan every year, approximately 20% of them never manage to repay the loan and eventually lose their vehicle. This also affects their welfare. So, taking into consideration such facts, these states have decided that title loans pose a serious risk to the livelihoods of the people that need their car, truck or motorcycle to go to work and make a living. That aside, many title loans that are marketed as 30-day loans, actually mislead consumers.

As for the rest for the states, sixteen of them allow title lenders to operate freely while another four allow them through a loophole in the law. For instance, title loan consumers in California usually have to take out title loans for a minimum of $2,500*. This is because the interest rate is capped for loans up to that specific amount of money. However, consumers can repay the loan within 8 months on average. At the standard 300% APR, they end up paying back over $5,000 in interest alone. For most people, those extra $5,000 is a significant amount of their annual income.

Finally, in states like Kansas, interest rates are not capped for open-ended credit through qualified lenders so title loans are structured pretty much like open-ended lines of credit.

* In South Carolina, the minimum loan amount is $600 while in Louisiana, it is $350 with a 2-month payback period. This allows title lenders to get around state laws that forbid over-secured loans and unfair lending practices.

Should Title Loans Be Illegal or Not?

Those that strongly criticize title loans, such as The Southern Poverty Law Center, the Center for Responsible Lending, and the Consumer Federation of America, insist that they (the loans) are detrimental to the welfare of the consumers to whom they are marketed to. According to statistics, people with annual earnings between $15,000 and $35,000 comprise the largest share of borrowers. For those people, the average loan amount is around $1000, which equates to more than $2,000 in interest, plus the extra fees they are called to pay when the loan rolls over. In some cases, that amount of money is more than ¼ (even 1/3) of a low-income borrower’s annual income.

What is suggested? To cap interest rates at 36% APR, make small loans available and affordable for people with bad credit or poverty-stricken individuals, who usually take out a car title loan to pay their utility bills or cover an emergency, and limit the amount of time a title loan borrower can owe money to a lender annually.

On the flip side, critics of the reform bills claim that reducing the interest rates could potentially force title loan shops to bankruptcy, which will consequently, push consumers to unregulated lenders and even higher-interest loans.

Truth be told, after years of debate over whether title loans should be illegal or not, no real consensus has emerged. One thing is for sure, though. There is still a long way to walk before reaching an agreement.