Whatta you do when you've pulled all the equity out of yer home, but those danged credit card bills are due and you still need some scratch? Why, take out a 2nd mortgage on your car, natch!<G>
arizonarepublic.com
Title loans popular
Borrowers risk repossession of car and high interest rates
By Hal Mattern
The Arizona Republic
Aug. 20, 2001 12:00:00
When jockey Nathan Thacker was thrown from an injured horse during a recent Turf Paradise race, he also was thrown out of work with a broken collarbone.
Strapped for cash and behind on his rent, Thacker needed a few hundred dollars last week to tide him over until he started riding again. But because of his poor credit history, he was unable to get a bank loan.
Then he found the money in his 1985 Chevy Blazer.
Thacker used the paid-off vehicle as collateral to borrow $350 from Cash Time Title Loans, one of a small but growing number of companies in Phoenix that loan money to car owners.
Such companies provide short-term, high-interest loans to people who need cash more quickly than they can get it from a bank, or whose credit histories preclude them from qualifying for traditional loans.
"Nobody likes to pay high interest rates, but this was real convenient," said Thacker, who received a check from Cash Time less than an hour after he applied for the loan.
Title loans allow borrowers to tap into the equity in their cars in much the same way that homeowners secure home-equity loans. The difference is that title loans are small and short term, usually only a few hundred dollars borrowed for two or three months, and carry interest rates of 10 percent to 17 percent a month. That translates into annual rates of 120 percent to 204 percent, which must be revealed by the lenders.
The borrower continues to own and drive the vehicle, but the lender holds a lien against the title until the loan is repaid. Failure to repay the loan can result in repossession of the car.
Such loans aren't for everybody, and consumer groups criticize the industry, saying it traps desperate, low-income borrowers in situations that could result in the loss of their vehicles.
But industry officials argue that they are providing a service for people with nowhere else to turn. They say that while most of their customers have credit problems, they also attract people who need money to cover emergency expenses but don't have time to secure bank loans. Small-business owners also use title lenders to get quick cash to temporarily cover expenses.
"I think the product has been very well-received by the public," said Scott Allen, owner of Cash Time and president of the Arizona Title Loan Association, an industry trade group. "The only people against this kind of product are the ones who never have to use it."
The title-loan industry is fairly young in Arizona, with a law regulating the businesses taking effect only a year ago.
Under that law, title-loan companies must be licensed by the state Banking Department, and the interest rates they can charge are capped somewhere between 10 percent and 17 percent a month, depending on the size of the loan.
That's lower than some other states, where annualized rates are as much as 300 percent.
Before the law was passed, title loans were legal in Arizona, but they fell under the state's usury law that caps interest rates on consumer loans at 36 percent annually.
Companies avoided the cap by structuring deals as sale/lease-back arrangements instead of loans. Customers would sell their cars to the companies for about 10 to 20 percent of their retail Blue Book values, then lease them back for a daily rate. They had the option of buying the cars for the original purchase price within a year if all lease payments were made.
But the practice was controversial, and the Attorney General's Office sued one of the larger sale/lease-back companies in 1998, claiming it was violating state consumer-lending laws by charging as much as 365 percent in interest and fees.
The state Court of Appeals agreed in a ruling late last year.
By then, however, the industry had convinced the Legislature to step in and clarify the statutes regarding title lending, resulting in the current law regulating such loan activity.
It was passed despite opposition from the Attorney General's Office and consumer groups, which argued that the rate caps were too high.
Critics also contend that title loans target unsophisticated borrowers who may not be aware that they could easily lose their vehicles.
"I'm not crazy about the practice," said Kim McGrigg of Consumer Credit Counseling Services Southwest, which helps people with debt problems.
"I think it is a predatory lending tactic that takes advantage of people in a desperate situation. It's not a wise financial move for consumers, especially if they aren't aware of exactly what they are doing."
Despite such criticism, the title-loan industry appears to be operating with little controversy in Arizona. Both the Banking Department and the Attorney General's Office said they have received few consumer complaints about title-loan companies since the law took effect.
There are now about 12 title-loan companies operating in the state, with more expected to open, Allen said.
"I wouldn't say it is a huge industry, but it is somewhat in its infancy," he said. "I think it will grow as people realize it is available."
Allen said the business model is not based on repossessing cars, because repossessions are costly and time consuming. He said title loans have a 10 to 15 percent default rate, but that many borrowers manage to scrape up enough money to repay the loans before their cars are repossessed.
Under state law, title lenders must sell repossessed vehicles at auction and return to the borrowers any money that exceeds the amount of the debt.
Allen said the higher interest rates charged by title lenders are justified by the risk they take.
Not only do most of their customers have credit problems, but the cars that secure the loans are often older models that could break down at any time, reducing their value.
He said people who need money fast, within 30 minutes or an hour, are more than willing to pay the higher rates and to risk the possibility of losing their vehicles.
Thacker, the Turf Paradise jockey, agreed.
"That's part of the deal," he said. |
