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Loans Secured by Car Titles Trap Borrowers in Cycle of Debt |
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April 18, 2005
Consumers who put their cars on the line to borrow a few hundred dollars for one month become trapped in a cycle of repeated loans with interest rates often around 300 percent. Borrowers often find themselves "rolling over" these loans repeatedly -- paying huge amounts in interest and fees while barely touching the principal. In many cases, the lender repossesses the car after the borrower has made substantial payments. That can be devastating because a car is often the borrower's largest asset and his or her only way to get to work. "Car title lenders are taking a page out of the payday lender playbook by making very short-term loans without considering the borrower's ability to repay the loan," said Mark Pearce, CRL's President. "Emergency loans should help families out of trouble, not keep them in it." CRL and CFA have issued a first report on the car title pawn/loan industry, titled "Car Title Lending: Driving Borrowers to Financial Ruin," which describes the title loan product and industry, illustrates predatory aspects of these over-secured small loans, and makes recommendations for stronger protections for borrowers. To get a title loan, borrowers sign over the title to a paid-for car and, in some states, provide the lender with a spare set of keys. The loan is usually due within a month in a lump-sum payment, making it difficult for families to repay the loan. Since car title loans are typically made for a fraction of the value of the car, the lender is well-protected if the borrower fails to make the full payment at the end of the month. In some states, title lenders are allowed to keep the surplus from the sale of the car, allowing title lenders to reap a windfall from the borrower's default. "Some title lenders claim their secured loans are "pawns," "sale leasebacks," or open end credit to evade state usury and small loan protections," stated Jean Ann Fox, CFA's director of consumer protection. "State legislatures should close loopholes and protect consumers' assets from unfair lender terms and practices." While CRL and CFA do not encourage states to legalize small loans based on titles to vehicles, the report spells out an extensive set of legal protections that should apply to car title loans. Establish Fair and Affordable Loan Terms. Title-secured loans should be repayable in affordable installments rather than a lump sum. Rates should be limited, and lenders should be required to consider the borrower's ability to repay. Borrowers should have a right to cancel loans within a reasonable time and to prepay without penalty at any time. Report Your Experience
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