A title loan (also known as a car title loan) is a type of secured loan where borrowers can use their vehicle title as collateral.[1] Borrowers who get title loans must allow a lender to place a lien on their car title, and temporarily surrender the hard copy of their vehicle title, in exchange for a loan amount.[2] When the loan is repaid, the lien is removed and the car title is returned to its owner. If the borrower defaults on their payments then the lender is liable to repossess the vehicle and sell it to repay the borrowers’ outstanding debt.
These loans are typically short-term and tend to carry higher interest rates than other sources of credit. Lenders typically do not check the credit history of borrowers for these loans and only consider the value and condition of the vehicle that is being used to secure it. Despite the secured nature of the loan, lenders argue that the comparatively high rates of interest that they charge are necessary. As evidence for this, they point to the increased risk of default on a type of loan that is used almost exclusively by borrowers who are already experiencing financial difficulties.
Most title loans can be acquired in 15 minutes or less on loan amounts as little as $100. Most other financial institutions will not loan under $1,000 to someone without any credit as they deem these not profitable and too risky. In addition to verifying the borrower's collateral, many lenders verify that the borrower is employed or has some source of regular income. The lenders do not generally consider the borrower's credit score.
History
Title loans first emerged in the early 1990s and opened a new market to individuals with poor credit and have grown increasingly popular, according to studies by the Center for Responsible Lending and Consumer Federation of America.[3] They are the cousin of unsecured loans, such as payday loans. Since borrowers use their car titles to secure the loans, there’s risk that the borrower can lose their vehicle by defaulting on their payments due to personal circumstances or high interest rates, which almost always have APR in the triple digits—what are sometimes called “balloon payments”.
Alternative title lending exists in many states known as car title pawn or auto pawn as they are called. Similar to a traditional car title loan, a car title pawn uses both the car title and the physical vehicle (which is usually stored by the lender) to secure the loan much like any secured loan works, and there are the same risk and factors involved for the borrower but in most cases they will receive more cash in the transaction since the lender has both the vehicle and title in their possession.
Process
A borrower will seek the services of a lender either online or at a store location. In order to secure the loan the borrower will need to have certain forms of identification such as a valid government-issued ID like a driver’s license, proof of income, some form of mail to prove residency, car registration, a lien-free car title in their name, references, and car insurance, though not all states require lenders to show proof of auto insurance.
The maximum amount of the loan is determined by the collateral. Typical lenders will offer up to half of the car's resale value, though some will go higher. Most lenders use Kelley Blue Book to find the resale value of vehicles.[4] The borrower must hold clear title to the car; this means that the car must be paid in full with no liens or current financing. Most lenders will also require the borrower to have full insurance on the vehicle.
Depending on the state where the lender is located, interest rates may range from 36% to well over 100%. Payment schedules vary but at the very least the borrower has to pay the interest due at each due date. At the end of the term of the loan, the full outstanding amount may be due in a single payment. If the borrower is unable to repay the loan at this time, then they can roll the balance over, and take out a new title loan. Government regulation often limits the total number of times that a borrower can roll the loan over, so that they do not remain perpetually in debt.
If the borrower cannot pay back the loan or is late with his or her payments, the title loan lender may seek to take possession of the car and sell it to offset what is owed. Typically, lenders choose this option as a last resort because it may take months to recover the vehicle, and repossession, auction, and court costs all decrease the amount of money they are able to recoup.[5] During this time, the lender is not collecting payments yet the vehicle is depreciating. Most states require the title loan lender to hold the vehicle for 30 days to allow the borrower to recover it by paying the balance. Typically, any amount from the sale over the existing loan balance is returned to the defaulter.
Today, the internet has revolutionized how companies can reach their clientele, and many title loan companies offer online applications for pre-approval or approval on title loans. These applications require much of the same information and still may require a borrower to visit a store to pick up their money, usually in the form of a check. When filling out these applications, they may ask for things like the vehicle's Vehicle Identification Number (VIN) and/or insurance policy numbers.[6]
Loan calculation
The amount a borrower can be loaned is dependent on the worth of their vehicle. A lender will typically look up the auction value of the car being used as collateral and offer a loan that’s between 30% and 50% of the worth of the vehicle.[7] This leaves lenders a cushion to make profit if ever they need to repossess the vehicle and sell it at auction, in the event the borrower defaults.[8]
States offering title loans
Title loans are not offered in all states. Some states have made them illegal because they are considered a welfare-reducing provision of credit, or predatory lending.[9] Other states, like Montana, have begun placing strict regulations on title loans by not allowing the APR to reach above 36%, down from the previous 400%. However, Montana has recently voted against allowing title loans in the state.
In 2008, New Hampshire passed a law capping APR at 36%.[10] Some companies claim their average loan amounts to be between $300 and $500, and had to shut down their store fronts in that state, or their business entirely, because their business could not survive on a low APR for low loan amounts. Since then, the law has been reversed and new growth in the title loan industry has emerged, allowing title loan lenders to charge 25% interest a month, or roughly 300% APR.[11]
States continue to vote on legislation allowing or disallowing title loans. Some states have no limit on the APR that title loan companies can charge, while others continue to crack down and push for stricter regulation. Early in 2012, Illinois recently voted to cap APR on title loans at 36%, with other provisions that would limit the title loan industry in the state. The vote did not pass, but voters and politicians in Illinois and other states continue in their convictions to regulate or outlaw title loans.[12]
The California State Assembly passed a law in 2020 that set an interest rate cap on all loans from $2,500-$10,000 with that title loans were included. In 2020 California State Assembly set a 30% cap on all auto title loans of at less than $2,500.[13]
Demographic of small-dollar-credit consumers
Small-dollar-credit (SDC) refers to services offered by payday and title loan industries. In 2012, a study was conducted by the Center for Financial Services Innovation. According to the study, SDC consumers are generally less educated, have more children, and are based in the South, where there is a greater concentration of unbanked or underbanked people. In addition, there’s a healthy spread of SDC consumers with a range of salaries—showing 20% of SDC consumers have a household income between $50,000 and $75,000. However, 45% of respondents to the survey would classify themselves as “poor”.[14]
In a BBC article, a spokesman for a company offering short-term loans says that APR is not a valid model when assessing costs associated with short-term subprime loans, and that the charges are appropriate for the convenience of quickly obtaining a short-term loan. Instead, the APR model is better for assessing costs associated with a middle- or long-term loan options.[15]
The high interest rates on title loans are justified by defenders of the industry, stating that the higher interest rates are necessary for the lending companies to turn profit. The borrowers are considered "high risk" and may default on their debt. Therefore, the higher interest rates are a means of securing profit even if the borrower defaults, and ensures the company sees a positive rate of return.[16]
Criticism
Critics of title loans contend that the business model seeks and traps impoverished individuals with ridiculous interest rates by lenders who aren’t entirely transparent regarding the payments. This practice lends confusion and so some borrowers are unaware of the situation that getting a small-dollar-credit loan puts them in. However, they are already locked in the loan and have no means of escaping other than paying the loan off or losing their vehicle.
The practice has been compared to loan sharking, because the interest rates are so high.[17]
Even though states are placing stringent restrictions on things like interest rates that can be charged, regulating the practices of companies offering short-term loans, like payday loans or title loans, proves to be a difficult endeavor. The Consumer Financial Protection Bureau and the Federal Trade Commission, both federal regulatory agencies responsible for enforcing federal law with non-banking institutions, admit that they do not have the authority to enforce the Military Lending Act, which states that military members and their families can pay an APR no higher than 36%, while banning loans to service members that would be secured through their banking accounts, vehicles, or paychecks.[18]
Some lenders can move around the Military Lending Act's restrictions by offering open-ended credit loans instead of title loans or payday loans. This allows them to continue charging triple-digit APR on their loans.[19]
Some groups, such as the Texas Fair Lending Alliance, present title loans and payday loans as a form of entrapment, where taking out one of these means that borrowers will find themselves cycling further into debt with less chances of getting out of debt when compared to not taking the loan out at all, contending that 75% of payday loans are taken out within two weeks of the previous loan in order to fill the gap in finances from when the loan was originally taken out. In 2001, Texas passed a law capping interest rates on title loans and payday loans. However, lenders are getting around the restrictions by exploiting loopholes allowing them to lend for the same purposes, with high-interest rates, disguised as loan brokers or as a Credit Services Organization (CSO).[20][21]
The Vice President of state policy at the Center for Responsible Lending in Durham, North Carolina argues that the car title loan model is built around loans that are impossible to repay. He goes on to cite a 2007 study by the Center for Responsible Lending which shows that 20% of title loan borrowers in Chicago had taken out a loan in order to repay a previous loan to the same lender.[22]
Evidence from The Pew Charitable Trusts cites a need for consumers to be better informed.[23] The Pew report states that of the more than 2 million consumers who obtain title loans, one out of nine consumers default on their loans, and notes that repossession affects approximately 5 to 9 percent of borrowers who default.
In finance, a loan is the transfer of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money.
In the United States, a car dealership is a business that sells cars. A car dealership can either be a franchised dealership selling new and used cars, or a used car dealership, selling only used cars. In most cases, dealerships provide car maintenance and repair services as well as trade-in, leasing, and financing options for customers.
Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan.
Refinancing is the replacement of an existing debt obligation with another debt obligation under a different term and interest rate. The terms and conditions of refinancing may vary widely by country, province, or state, based on several economic factors such as inherent risk, projected risk, political stability of a nation, currency stability, banking regulations, borrower's credit worthiness, and credit rating of a nation. In many industrialized nations, common forms of refinancing include primary residence mortgages and car loans.
A payday loan is a short-term unsecured loan, often characterized by high interest rates.
A loan shark is a person who offers loans at extremely high interest rates, has strict terms of collection, and generally operates outside the law.
The term annual percentage rate of charge (APR), corresponding sometimes to a nominal APR and sometimes to an effective APR (EAPR), is the interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card, etc. It is a finance charge expressed as an annual rate. Those terms have formal, legal definitions in some countries or legal jurisdictions, but in the United States:
Predatory lending refers to unethical practices conducted by lending organizations during a loan origination process that are unfair, deceptive, or fraudulent. While there are no internationally agreed legal definitions for predatory lending, a 2006 audit report from the office of inspector general of the US Federal Deposit Insurance Corporation (FDIC) broadly defines predatory lending as "imposing unfair and abusive loan terms on borrowers", though "unfair" and "abusive" were not specifically defined. Though there are laws against some of the specific practices commonly identified as predatory, various federal agencies use the phrase as a catch-all term for many specific illegal activities in the loan industry. Predatory lending should not be confused with predatory mortgage servicing which is mortgage practices described by critics as unfair, deceptive, or fraudulent practices during the loan or mortgage servicing process, post loan origination.
An asset-backed security (ABS) is a security whose income payments, and hence value, are derived from and collateralized by a specified pool of underlying assets.
Second mortgages, commonly referred to as junior liens, are loans secured by a property in addition to the primary mortgage. Depending on the time at which the second mortgage is originated, the loan can be structured as either a standalone second mortgage or piggyback second mortgage. Whilst a standalone second mortgage is opened subsequent to the primary loan, those with a piggyback loan structure are originated simultaneously with the primary mortgage. With regard to the method in which funds are withdrawn, second mortgages can be arranged as home equity loans or home equity lines of credit. Home equity loans are granted for the full amount at the time of loan origination in contrast to home equity lines of credit which permit the homeowner access to a predetermined amount which is repaid during the repayment period.
The Truth in Lending Act (TILA) of 1968 is a United States federal law designed to promote the informed use of consumer credit, by requiring disclosures about its terms and cost to standardize the manner in which costs associated with borrowing are calculated and disclosed.
Credit is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately, but promises either to repay or return those resources at a later date. The resources provided by the first party can be either property, fulfillment of promises, or performances. In other words, credit is a method of making reciprocity formal, legally enforceable, and extensible to a large group of unrelated people.
Repossession, colloquially repo, is a "self-help" type of action, mainly in the United States, in which the party having right of ownership of the property in question takes the property back from the party having right of possession without invoking court proceedings. The property may then be sold by either the financial institution or third party sellers.
A secured loan is a loan in which the borrower pledges some asset as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral, and if the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to regain some or all of the amount originally loaned to the borrower. An example is the foreclosure of a home. From the creditor's perspective, that is a category of debt in which a lender has been granted a portion of the bundle of rights to specified property. If the sale of the collateral does not raise enough money to pay off the debt, the creditor can often obtain a deficiency judgment against the borrower for the remaining amount.
A mortgage loan or simply mortgage, in civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any purpose while putting a lien on the property being mortgaged. The loan is "secured" on the borrower's property through a process known as mortgage origination. This means that a legal mechanism is put into place which allows the lender to take possession and sell the secured property to pay off the loan in the event the borrower defaults on the loan or otherwise fails to abide by its terms. The word mortgage is derived from a Law French term used in Britain in the Middle Ages meaning "death pledge" and refers to the pledge ending (dying) when either the obligation is fulfilled or the property is taken through foreclosure. A mortgage can also be described as "a borrower giving consideration in the form of a collateral for a benefit (loan)".
A payday loan is a small, short-term unsecured loan, "regardless of whether repayment of loans is linked to a borrower's payday." The loans are also sometimes referred to as "cash advances," though that term can also refer to cash provided against a prearranged line of credit such as a credit card. Payday advance loans rely on the consumer having previous payroll and employment records. Legislation regarding payday loans varies widely between different countries and, within the United States, between different states.
Payday loans in the United Kingdom are typically small value and for short periods. Payday loans are often used as a term by members of the public generically to refer to all forms of High-cost Short-term credit (HCSTC) including instalment loans, e.g. 3-9 month products, rather than just loans provided until the next pay day.
TMX Finance is the parent company to the brands TitleMax, TitleBucks, EquityAuto Loan, and InstaLoan. The company holds more than 900 stores in over fourteen states including Alabama, Arizona, Delaware, Florida, Georgia, Mississippi, Missouri, Nevada, New Mexico, South Carolina, Tennessee, Texas, Utah, and Wisconsin, and an online presence in Idaho. TMX Finance’s brands serve individuals who generally have limited access to consumer credit from banks, thrift institutions, credit card lenders, and other traditional sources of consumer credit.
A guarantor loan is a type of unsecured loan that requires a guarantor to co-sign the credit agreement. A guarantor is a person who agrees to repay the borrower’s debt should the borrower default on agreed repayments. The guarantor is often a family member or trusted friend who has a better credit history than the person taking out the loan and the arrangement is, therefore, viewed as less risky by the lender. A guarantor loan can, consequently, enable someone to borrow either more money, or the same amount at a lower rate of interest, than they would otherwise be able to secure through a more traditional type of loan.
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