CAR TITLE LOANS: PREDATORY LENDING STRIKES AGAIN
If you like payday lending, you’ll love car title lending
The Problem:
Two large out-of-state car title lenders are charging 350% interest to make loans to Virginians that are struggling to make ends meet. Even though small loans are capped at 36% interest under Virginia law, these lenders are exploiting a legal loophole. It is estimated that over 150 car title lenders are currently operating in Virginia. Tennessee passed car title authorizing legislation and there are now over 900 car title lenders in Tennessee. In 2004, Tennessee car title lenders repossessed 17,313 cars. If the borrower defaults, car title lenders can easily repossess the borrower’s means of transportation, often their link to their jobs and other vital services. Let’s not let this happen in Virginia.
Background:
With no credit check, the borrower can quickly obtain a loan by exchanging their car title and an extra set of keys to their vehicle as collateral. Most borrowers are barely able to make monthly interest payments and after only several attempts, most owe more than the amount they borrowed. While the loan can be paid off early with no penalty, the vehicle can be repossessed with only one missed payment.
Astronomical Interest Rates PLUS FEES - A car title loan in Virginia typically carries an annual percentage rate of 360%, which works out to $125 of interest for a one-month loan of $500. In addition, borrowers must pay fees, including an “annual membership fee” and another fee for having a lien recorded on the car title. One Virginia car title lender charges a $50 “membership” fee in addition to the 360% interest. Another charges a 25% “cash advance fee” at the outset of the loan, or 25% of the total amount borrowed!
A woman borrows $800 from a car title lender in Lynchburg. She is charged $200 for a cash advance fee and 30% per month interest or 360% APR. Her monthly payments (interest only) are $300. She misses some payments; her car is repossessed and sold a few months later for $1,050 and she still owed the lender $463.
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A woman borrows $2,950 from a car title lender in Harrisonburg. They charge her a cash advance fee of $737.50. Her monthly payments (interest only) are $1,106.25.
Threat of Repossession - With only 15 days to make the first payment on a loan, borrowers are at risk of repossession, which can occur after one missed installation. Most Virginians are forced to rely on their cars as a means of transportation to and from work, school, healthcare, etc. Without a vehicle, victims of car title loans often lose their jobs because of missed work, and consequently, are unable to meet other basic needs.
Inability to Escape the Loan – A car title loan doesn’t help a borrower in a financial emergency but rather puts them in a perpetual state of financial crisis, struggling to make monthly payments so they don’t lose their method of transportation. The interest quickly mounts as paying the loan off with a balloon payment is virtually impossible.
Secured Lending should be Cheaper – Secured lending is supposed to be cheaper for borrowers than unsecured lending, because the lender can look to collateral in the event of default.
Not the purpose of Open-end Credit – The car title lenders have avoided interest rate limitations by structuring the debt as open-ended credit, like credit cards. Open-end credit was deregulated in Virginia but the legislature has never decided that secured small loans should be deregulated.
The Solution:
Virginia’s open-ended credit statute was not intended for car title loans. Legislation capping interest rates on car-title loans is necessary to prevent any more Virginians from falling into a cycle of debt or losing their means of transportation. Although 36% APR is still high, it would represent dramatic progress over the current 360% APR charged by lenders in the state.
Virginia is called to protect consumers from this harmful form of predatory lending. Please support legislation that would bring meaningful reform to this industry:
We can no longer allow greedy corporations to prey on the poor and vulnerable. Protections must be in place to prevent the situation of car title lending from growing worse in Virginia. Let’s not legitimize this business and watch it turn into the next payday lending crisis. Call or write your legislator to express your support for legislative reform.
The Virginia Partnership to Encourage Responsible Lending (VaPERL) is a coalition working to reduce the dangers of predatory lending in Virginia. Members from organizations around the state include: AARP, Virginia Poverty Law Center, Virginia Interfaith Center for Public Policy, Housing Opportunities Made Equal, Richmond Better Business Bureau, Virginia Organizing Project, Virginia Citizens Consumer Council, Piedmont Housing Alliance, Virginia Muslim Coalition for Public Affairs, Peninsula Community Development Corporation, New River Community Action, Voices for Virginia’s Children and others.
If you are interested in learning more about predatory lending in Virginia or would like to join our listserve, please contact Helen O’Beirne, Responsible Lending Coordinator, at 804.643.2474 or helen@viginiainterfaithcenter.org.
Sources:
Fox, J.A. & Guy, E. (2005). Driven into debt: CFA car title loan store and online survey. Consumer Federation of America: http://www.consumerfed.org/pdfs/Car_Title_Loan_Report_111705.pdf#search='car%20title%20loan%20and%20virginia'
Shean, J. (June, 2005). Would you pay $125 to borrow $500? The Virginia Pilot, PilotOnline.com. http://home.hamptonroads.com/stories/story.cfm?story=87925&ran=162649&tref=po
