This is the 5th guest blog post in a series of 10 by Leah Gonzalez, a master's degree student in social work at the University of Texas in Austin and a graduate of Howard Payne University.
Auto title loans have the similar promised quick fix solutions of payday loans, and often the same potential to cause just as much financial instability. I may not have been very clear making distinctions between payday lending and auto title lending in my previous posts, so I want to give some fair time to this lending practice.
To receive one of these loans you are required to own a clear title of a car. The amount of your loan is based on the lender's estimation of your car's value. The lender will keep your car title as collateral during the repayment period. If full repayment is not made, the lender is then able to repossess your vehicle. More than 17,000 cars were repossessed by auto title lenders in Texas in the first half of 2012 alone (Texas Faith for Fair Lending, 2012). A study from our neighboring New Mexico, found that 71 percent of auto title loan borrowers had their vehicles repossessed (Adams & Martin, 2012).
Auto title loans are generally short-term loans and borrowers are often given a month to repay the full amount (The Center for Responsible Lending, 2012). Here's where the story becomes extremely similar to that of a payday loan. Auto title loans are often available in the same establishments as payday loans, so these lenders are targeting the same clientele. Since the loan is based on the value of your car; there is no acknowledgment of whether or not the borrower is able to repay the loan.
The average borrower who takes out an auto title loan will have to renew the loan eight times. Due to the lack of regulation in this industry (payday loans and auto title loans) in Texas, you could potentially make interest and fee payments on a loan indefinitely.
The Adams and Martin study shares the story of Susan Price. She was recently disabled and needed extra cash to pay off some bills and get through the holidays. With the title of her Jeep, valued at $10,000, Susan took out an auto title loan of $4,000. Unable to pay back the full loan amount, Susan's only option was to make the $580 monthly payments. These payments would continue for eighteen months, with Susan paying more than $10,000 for her $4,000 loan.
By implementing regulations, Texas could protect its residents from stories like Susan Price's.
Adams, O & Martin, N. (2012). Grand theft auto loans: repossession and demographic realities in title lending. University of New Mexico School of Law Legal Studies Research Paper Series.
The Center for Responsible Lending. (2012). Title loans: don't risk losing your car. The Center for Responsible Lending. Retrieved from http://www.responsiblelending.org/other-consumer-loans/car-title-loans/ .
Texas Faith for Fair Lending. (2012). Payday & auto title lending in texas a debt texas families can't afford. [Brochure].