Legalized Car Thievery: The Drive to Hold Your Pink Slip
By David G. Hicks
Attorney at Law, Pollak, Hicks & Alhejaj, P. C.
A new lending scheme by sometimes unscrupulous short term lenders has been called “legalized car thievery” by Rosemary Shahan, president of a California consumer advocacy organization results in about a quarter of a million Americans losing their vehicles to repossession. The Los Angeles Times reports that approximately 1 in 9 (or 11%) of vehicles with title loans fall prey. The Pew Charitable Trust found that more than two million people nationwide take out these auto title loans. The reason for the increasing popularity of this type of loan is that earlier versions of short term lending, such as payday loans have become subject to much stricter regulation by the President’s Consumer Financial Protection Bureau. Those lenders have figured out a detour, called auto title loan.
The typical way it works is a consumer needs a small sum for a short term purpose, say $500.00 to fix their furnace. These lenders will lend you the money, but frequently the borrower will be told that the loan has to be a higher number to qualify, say $2,000.00, even though only $500.00 is needed. Also, a preferred tactic is to not permit lump sum payments (where you could just pay back the $1,500 that you didn’t need). The title to your car is taken as collateral. According to the Pew research there can be a significant difference in fees and interest rates, but that the average rate on a one month loan was 300%. It also found that the typical borrower paid $1,200.00 per year in fees.
The L.A. Times report quotes Ms. Shahan as saying “(w)hat they want to do is get you into a loan where you just keep paying, paying, paying, and at the end of the day, they take your car.” The basic business model is that your car serves as collateral for the loan, it must have significant equity. Since repossession of the car and its subsequent sale can repay the loan, the auto title lenders are not punctilious about the borrower’s income or ability to repay the loan. In one particularly egregious example, a lady whose sole income was around $900.00 per month from social security ended up with a $345.00 monthly payment to keep her otherwise paid for vehicle.