Title Loans are Predatory: Avoid Them at All Cost
Title loans are short term, high interest emergency loans that are easy to qualify for because of their loose loan application requirements. All you need is a government issued ID and a title for a paid off vehicle. That’s it. Your credit score doesn’t matter, your income doesn’t matter, even your debt-to-income ratio is utterly irrelevant to title loan providers. Their business model is, quite literally, designed to squeeze desperate borrowers for as much money as they possible can and if they can’t cover the loan, they take their vehicle.
We can’t say why title loans are legal to begin with, much less why lenders are still allowed to operate in the US, but we can teach you more about why title loans are predatory so you can find a lending option that won’t cause you to lose your car.
Why Car Title Loans are Predatory
Short Loan Terms
Contrary to what you might think about how long you have to pay back a title loan, they’re typically due in full within a couple weeks to a month. Most people can’t afford to repay a loan of this size in that short of time frame with interest, especially if they’re already hurting for cash. This causes borrowers to take out additional loans with more frees to cover the initial loan and puts them into a vicious debt cycle they won’t make it out of.
High Interest Rates
Short term loans are notorious for having high interest rates. They can range anywhere from 80% to well over 400% and title loans are no different. The average interest rate on a car title loan is 25% per month that the loan is being financed. What this means is that if you take out a $1,000 loan and pay it back on time at the end of the month, you’ve paid $1,250. But if you take longer to pay off the loan, you’re still paying $250 in interest every month. That means if you take a year to pay it off, the total cost of the loan is $4,000! That’s $1,000 for the loan and $3,000 in interest ($250 x 12 monthly payments).
They Target the Desperate
With sky high interest rates and an almost non-existent barrier to entry, title loan providers target borrowers that are having trouble qualifying to other types of loans because of their poor credit score, bad credit history, or insufficient income. This makes these loans incredibly appealing because these people need money and they can get it with very few obstacles. The problem is that these people are being denied for other types of loans because they can’t afford to pay them back. Car title loan providers don’t care. They approve people for a loan they know they can’t repay and when they do default on payment, they seize the borrower’s vehicle to cover the difference.
High Default Rate
In 2016, a study found that one out of every 5 title loans has the vehicle that was put as collateral seized by the lender for the borrower not being able to repay the loan. That’s 20% of all title loans end up with the borrower having their car taken from them. They can’t get to work, they can’t go to the grocery store, they can’t go anywhere quickly, and now their credit rating has taken a hit as well for defaulting on a loan.
That’s not the end of it though. Nearly 4 out of every 5 title loans aren’t repaid in a single payment which means that virtually no one is paying back their title loan within that first month. They have to take out another loan in order to cover the original loan. Only 12% of people that take out a title loan are able to pay it off in that first month.
Illegal in 20+ States
Yes, there are states where it’s illegal to offer title loans. 30 to be exact. That’s 60% of the country where IT’S ILLEGAL TO OFFER TITLE LOANS. Do we need to repeat that again?
30 out of 50 states have legislation that outlaw these predatory loans because that’s exactly what they are. They target the desperate, charge them higher interest than almost every other type of loan, and threaten the borrower with seizing their vehicle to recoup the cost of the loan if they don’t make their payments. They are designed to put you in debt and keep you there. Title loans have ruined lives and are ruining lives right now by shackling people with debt they’ll never be free from.
There is zero reason for anyone to take out a title loan, ever. These predatory loans are illegal in more than half of the country, 20% of borrowers lose their vehicle, and only 12% of borrowers are able to pay it off without having to take out an additional loan. Title loans prey on people who are desperate for money and can’t afford to pay off their loan. There are plenty of other loan types out there that aren’t predatory and are borrower friendly.
Cary Silverman is a consummate entrepreneur having sold multiple companies during his 20 years of business experience in the financial industry, but for him, it isn’t about the money. His success is rooted in his passion to focus on doing something better today than it was done yesterday. These days, he’s the CEO of Waldo General, Inc. that oversees the operation of King of Kash.