More than 2 million people a year, on average, take out auto title loans nationwide, according to a study recently released by the Pew Charitable Trusts. Auto title loans are growing rapidly in California and 24 other states where slack regulations have allowed them to gain popularity. Credit unions need to take notice.
In California alone, the number of auto title loans jumped to 91,505 in 2013, the latest data available, from 64,585 in the previous year and 38,148 in the first year, 2011, that was tracked by the state Department of Business Oversight.
Short-term lenders, also known as Payday lenders, are finding a way around new restrictions on payday and other small loans and are misinforming consumers when it comes to the small print when they use their debt-free vehicles as collateral.
High interest rates are not disclosed to consumers and about 1 out of 9 borrowers in California have their vehicles repossessed. In addition, the state has no limit on interest rates for consumer loans of more than $2,500, and it otherwise doesn't regulate auto title loans.
TitleMax Inc. boasts that it alone makes a total of 2,500 loans a day from its 1,350 locations in 16 states.
“In about 30 minutes, a TitleMax car title loan can put up to $10,000 in your pocket and get your life back on track,” according to the TitleMax website.
Kyle Conger of Hermosa Beach, CA, almost lost his Ford F150 truck after taking out a Paydayloan for $2,000.
“I wanted $800, but they said no deal unless I took more money. I figured I would pay it back but when my interest grew so fast I had to ask my mom to bail me out,” he said. “I had no idea my interest was over 100 percent. I would have sold my truck if I knew that was the deal.”
Loan sizes and fees vary by state, but the most common annual percentage rate on a one-month loan was 300 percent, according to Pew, which surveyed borrowers and analyzed regulatory data and company filings.
State law limits payday loans to $300, minus a maximum fee of $45. California also caps interest rates on consumer loans of less than $2,500 on a sliding scale that averages about 30 percent. Consumer loans above $2,500 have no interest rate limit.
Almost all of the auto title loans in California are above that level, according to the state's business oversight department. Most range from $2,500 to $5,000. Of those, about 45% carried annual percentage rates of at least 100 percent, according to state data for 2013 which is a bad deal for all consumers. Not all, but many credit unions offer car loans for members with less than perfect credit.
“We always recommend that people do business with people and businesses they trust and if it sounds too good to be true, it probably is. If you work with a trusted lender, they should be able to help you find a solution that is in your best interest and fits your needs and your ability to pay,” said Ron Felder, executive vice president and chief lending officer at the $2.4 billion Redwood Credit Union in Santa Rosa, Calif. “RCU offers auto loan programs designed specifically to assist borrowers with no credit history or prior credit challenges to help them build or rebuild credit. Financial education is a mandatory component, to help these members establish and maintain a good credit record.”
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