The cheerful come-ons seem more cheesy than sleazy -- “Looking for a New Way to Borrow?” “Apply Now-Get Cash Today!” “Go From $0 to Cash in Less Than an Hour” -- but these are not the friendly offers of local diversified banks. They are the insidious pitches of companies that do one thing very well: make car title loans to Americans desperate for cash.
These highly specialized lenders do a gangbuster business, pulling in hundreds of millions of dollars in loan payments annually. Still, the no-savings-just-loans outfits are little known to most middle- and upper-income families. That’s because their business model entails opening tens of thousands of storefronts in poorer neighborhoods, and throwing up websites online, to target families who need cash but whose only significant asset is a car, often a high-mileage beater. They sell their customers high interest rate loans against some portion of the value of their cars, usually without a credit or income check. And they make those loans at unconscionable rates that can hit 600 percent on an annual basis.
Hard to believe, but it gets worse. When borrowers default, these companies swoop in and “foreclose” on their cars. This is a simple and speedy process because, before handing over the cash, they take both the car’s title and duplicate keys and sometimes install a tracking device on the vehicle. Repossessions can be done in terrifying or violent ways, as the National Consumer Law Center (NCLC) has documented [PDF]. But even when the repossessions are done peacefully, they leave the car’s now former owner with the sudden and daunting challenge of getting to work on time -- or getting to work at all -- in a transit-poor community. A car title loan victim can quickly find his or her job repossessed along with the car.
In an America that is so car dependent -- 50 percent of us have no public transit option to get to work -- and an America with plenty of people struggling to make ends meet with or without a job, it’s a brilliant, if despicable business model.
Not every state allows car title loans in this fully predatory form, but in those that do, lenders have mushroomed with banking deregulation. Companies like Cash America, North American Title Loans, New Century Financial, and Title Max market their loans aggressively in urban, especially minority, communities. Cook County, Illinois is home to several hundred brick and mortar locations that make loans with an average APR of 263 percent and repossess one of every five cars used as collateral. Until New Hampshire regulated the industry, 10,000 loans totaling over $7.5 million were made in that small state in a single year. Car title lenders repossessed over 17,000 cars in one recent year in Tennessee alone.
These loans can be structured in ways that make it surprising that default rates aren’t higher. Initial terms are usually a month, but loans are frequently rolled over, with further interest payments charged if the borrower is unable to repay quickly enough. A $2,000 car title loan can cost $5,250 in interest over 16 months. Yes, with repayment of the principal, that’s $7,250 to borrow $2,000.
Even smaller amounts of borrowing can snowball with devastating consequences. A single mother in Georgia took out a $450 loan from Atlanta Title Loans to help make her utility payments. She was charged $112.50 a month in interest until, unable to keep up four months later, she found the firm had repossessed her car in the middle of the night, and she could no longer get to work. A Virginia woman who borrowed $900 against her car just last year has already paid $4,000 to the car title company and still owes the full principal balance.
Car title loans are just one of a host of ways by which our existing car system sucks wealth out of poor and working class communities. Auto dealers targeting lower income customers often provide predatory loans on site and charge prices for used cars well above Blue Book values. Insurers can and do charge residents of poorer zip codes exorbitantly higher rates regardless of age or driving record. And while minimum wage earners or consumers with modest incomes might seem to be an unattractive customer base, there are a lot of households to extract wealth from when 100 million Americans make $25,000 or less and 90 percent own a car. Millions of customers times thousands of dollars of interest payments and thousands of dollars of repossessed car sales equals a lucrative market.
When you cross a car dependent transportation system with an under-regulated banking industry, you allow the wholesale looting of poorer American neighborhoods.
Some good news came with the midterm election: the number of states that have outlawed car title loans or some of the most egregious lending practices rose to 31 as Montanans voted yes on a rate cap for car title lenders, dropping the maximum from 400 percent to 36 percent (read the ballot text).
A variety of national organizations, such as the NCLC and Consumers for Auto Reliability and Safety, have been diligently educating consumers and encouraging stronger regulation of car usury. So, too, have local and regional groups such as the Virginia Poverty Law Center and New Hampshire Legal Assistance, key since the new Consumer Financial Protection Agency leaves regulatory power in the hands of the states.
Tougher rules are needed, and yet lower income Americans will remain dependent on the budget-busting automobile until we also provide better, more equitable transportation options.
Anne Lutz Fernandez, a former marketer and banker, and Catherine Lutz, an anthropologist at the Watson Institute at Brown University, are the authors of Carjacked: The Culture of the Automobile and its Effect on our Lives (Palgrave Macmillan).
