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.”
“It’s a good way for some people with few assets to get money and, in many cases, can be less expensive than the alternatives,” Lehrer notes, pointing out that credit card companies charge equally high penalties for non-payment. Lehrer says he had a friend who was college-educated but out of work and desperate for money to pay his rent. He took out a car title loan and rolled it over, but eventually paid it back.
“The legitimate alternatives are pawn shops, payday loans (which you have to be employed to get) and loan sharks,” Lehrer writes in an e-mail to . “Even against these, I have to say that car title loans don’t stack up all that well. On the other hand, if the alternative is having ‘Fat Tony’ break your legs, a car title loan can be a good way to go.”
To see how a typical transaction would pencil out, Edmunds called a car-title 
company, City Loan, to enquire about getting a loan using a 2007 Honda Fit Sport as collateral.
A pleasant-sounding company representative was eager to help. She explained that the company lends 60 percent of the wholesale value of the car and offered to loan $3,500 and “possibly more” once she saw the car. When asked directly, she said the interest rate would be 6-9 percent per month. At 9 percent per month, the annual interest would be 108 percent.
Ross Tesser, a branch manager at City Loan, says that in California, proof of employment is required to get a car title loan. He says that he warns potential customers not to take out their loans unless they really need to. Sometimes, the need is so great that people do it anyway.
The loan companies present themselves as an option in financial emergencies because they don’t require a good credit score – or even proof of employment in some states
“We have customers who hug us,” he says. “I can read you letters we get from some customers.” In one such letter, his customer wrote that she was “up a creek without a paddle” and effusively thanked him “for all the help you gave me when I really needed it.”
But Melissa Whittaker, a counselor at Consumer Credit Counseling in Augusta, Georgia, sees a different side of the business. Recently, as she was talking to a client about her debts, the woman’s phone buzzed continuously. It was a repo man, trying to locate her car because she had defaulted on a car title loan.
As Whittaker points out, while the advertising from car title loan companies conveys the image that “they are doing the communities a favor because they go into high-crime, high-poverty areas and extend credit where banks won’t,” she doesn’t see them as a benefit for people facing money problems. “I don’t see this as a solution to poverty,” Whittaker says. “They are making it harder for [people] to get out of bad financial situations.”