If you have read any of our material regarding payday loans, you know that they are something that we vehemently oppose here at Repaid.org. The insane interest rates and the short repayment terms do nothing to help consumers. With the rapid expansion of title loan companies, it seems that a new plague is in town. That led us to wonder if title loans are actually worse than payday loans, so let’s have a look.
A Few Stats
Title loans have been around for years; generally in the most impoverished states. It is never a good sign when a trend starts with the poorest people. As title loan companies have expanded to more states, they have begun to issue 2.5 million loans per year. The average loan is around $1,000. These loans generate $3 billion for the lenders. While payday lenders manage to make $9 billion a year, the effects of a title loan may be more devastating, especially if a borrower can not repay the loan.
How A Title Loan Works
A borrower, usually desperate for cash, offers their vehicle as collateral for a 30 day loan. The car must have a clear title. The loan is in proportion to the value of the vehicle, as determined by the lender’s appraisal. Appraisals are done by the sales clerk while you wait, not by a professional. Pretty straightforward so far, but wait, its about to get crazy. The loan will come with an average upfront fee of $250. So a $1,000 loan will cost you $1,250 at a minimum. The loan must be paid in full within 30 days. What happens if you can not pay? You either lose your vehicle or extend the loan. Extending the loan will cost you another $250. According to a report by the The Pew Charitable Trusts, the average title loan borrower will pay $1,200 in additional fees over the course of a single loan. That $1,000 loan will set a borrower back by $2,450 before they are free.
Why Are They Riskier?
The two main reasons that title loans are riskier than payday loans are:
- they are easier to qualify for.
- They are usually in larger amounts.
The majority of payday lenders require a borrower to have proof of income, a checking account, and proof of residency. Payday loans average just $375 compared to the $1,000 for a title loan. Payday lenders will only lend up to 36 percent of a borrower’s proven monthly income.
Title lenders only ask that you have a clear title to a vehicle. The loans not only start out with a higher balance than payday loans, but the fees are much higher. The original loan usually represents at least half of a borrowers monthly income. Each extension increases that ratio. Add to that the very real risk that a borrower may lose their only means of getting to work and you can see how predatory these loans are. ”The problems with title loans are very much like the problems in the payday lending space,” says Nick Bourke, director of Pew’s small-dollar loans project. ”The difference is that title loans carry even higher costs than payday loans and borrowers face the additional risk of losing an asset, their car, that for some is their main form of transportation.”
Thanks in part to the work of consumer advocacy groups like Pew, the Consumer Financial Protection Bureau has begun constructing regulations that should curtail the payday and title lending industries nationwide. Some states have taken the initiative. For example, New York has capped fees at 25 percent. After the cap was instituted, payday lending nearly disappeared. Just not enough money in it.
Have you had any experiences with payday or title loan companies? We would like to hear about them in the comment section or on our Facebook page.
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