Voters in Montana recently approved a measure to limit car title loans to 36 percent interest, from the previous level of up to 400 percent. The decision was a victory for consumer-rights advocates, who believe these loans trap borrowers in a cycle of debt that is difficult to escape.
The loans are predatory because they’re made to people who have little ability to repay them, says Leslie Parrish, a senior researcher at the Center for Responsible Lending
But as the example of Montana suggests, these loans can carry triple-digit annual percentage rates and the repayment period is often as short as 30 days. A borrower who gets a $1,000 loan, for example, would have to repay $1,250 at the end of 30 days. If he couldn’t make this payment, he could pay just the interest, which would be $250 in this example. But then he would still owe $1,250 at the end of the next 30 days.
“The 30-day car title loan is a myth,” she says. For most people, repaying it in that time frame is nearly impossible. Car title loans are typically rolled over eight times before the loan is repaid or the car is repossessed, Parrish says.
Anyone considering taking out a car title loan should ignore the supposed convenience of the loan and exhaust other sources for cash first, including borrowing from relatives, counselors advise. Counselors also warn consumers not to use a car title if that vehicle is their only way to get to work, school or medical care. The reason is simple: If a borrower defaults, the title company repossesses the vehicle.
It isn’t easy to find car title loan defenders who aren’t part of the industry, but Eli Lehrer, national director of the Center on Finance, Insurance and Real Estate, which is part of the Libertarian think tank Heartland Institute, offers what he calls “a quasi-defense of an industry that gets a bad rap.”