Single-Payment Car Title Loans Can Lead to Long-Term Debt

By Doug Matus

In recent years, it seems like payday and title loan offices have sprung up on every street corner. Emblazoned with glaring signs that advertise “fast cash” and “no credit check,” these businesses can appear like a lifesaver for someone who needs to pay an immediate bill. Unfortunately, the single-payment loans these establishments offer encourage a cycle of indebtedness, and can worsen already tenuous financial situations.

If you ever feel tempted by a single-payment car title loan, make sure you understand the associated risks. A simple review of how title loans work will reveal that for many people, these quick fixes only lead to long-term debt.

How Single-Payment Car Title Loans Work

Single-payment car title loans are a variety of high-interest, short-term loans often sought by consumers who need emergency funds. The title of the borrower’s vehicle becomes collateral against the loan.

Unlike installment loans, single-payment loans require full repayment at the end of the loan’s term. Most of these loans come due after 30 days, though some have a turnaround in as little as two weeks. If the loan is not completely repaid, then additional fees and interest accumulate. If the borrower misses payments, the lender can seize the collateral — in this case, the borrower’s vehicle.

High Costs, Small Payout

To understand how title loans work for the benefit of lenders, consider this: a 2016 study from the Consumer Financial Protection Bureau (CFPB) revealed that 20 percent of car-title loan borrowers lose their vehicles as a result of missed payments.

The high-cost, small-payout reality of these loans often gets missed by borrowers, who simply need a fast solution to financial difficulties. A look at interest rates and fees make the predatory nature of these loans readily apparent, however.

“The main reason borrowers end up stuck with a huge debt after taking out such a loan is that the interest rates are extremely high,” says Jordan Perch, an automotive industry expert. “According to statistics from the CFPB, the average annual interest rate is 300%.”

Outsized Costs

In addition to exorbitant interest rates, car title loans often charge an excess of fees and late payment penalties. The aforementioned report from the CFPB found that consumers pay $8 billion in annual fees to single-payment loan providers. Fees associated with car title loans apprise nearly half that amount. When an asset as valuable as a vehicle becomes collateral for a $700 to $1000 loan, it’s not difficult to see how the costs outweigh the benefits.

A vehicle is often one of — if not the — largest asset owned by many single-payment loan borrowers. Not only this, but the car is a necessity to make it to work and earn income. The seizure of a vehicle can thus devastate the working-class individuals these loans target. In summary of the impact of car title loans on borrowers, Liana Molina, director of community engagement for the California Reinvestment Coalition, has some choice words:

“Car thieves actually do less harm,” says Molina. “They at least don’t take half your paycheck before they steal your vehicle.”

Cycle of Debt

The consequences of single-payment loans encourage a cycle of debt among borrowers. When a borrower cannot fulfill the payment at the end of a loan’s term, the threat of vehicle seizure comes into play. To avoid this, many borrowers take out further loans. What began as a short-term need to solve a problem becomes a long-term debt, as fees accumulate against the original amount owed.

This habit of loan renewal and indebtedness pays huge dividends to lenders.

“This practice of renewing loans, which is harmful for consumers, is where the industry reaps a majority of its profits,” says Molina. “The Consumer Financial Protection Bureau found that two-thirds of the industry’s business is based on people who take out six or more of these loans.”

Though marketed as cash infusions for those in need, single-payment car title loans are typically quite the opposite. The next time you find yourself in need of some cash, consider all other options: borrow from friends and family, tap into savings, or pursue a small, traditional loan from a reputable lender.

About the Author

Doug Matus is a freelance writer who frequently contributes to the Self blog.

Written on July 26, 2016

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