The Ugly Truth About Automobile Title Loans

   Nathalie Martin, University of New Mexico Law School, and Ozymandias Adams recently co-published their study of the automobile title loan industry in New Mexico in an article entitled Grand Theft Auto Loans: Repossession and Demographic Realities In Title Lending. If you ever needed a reason not to take out an automobile title loan, their study gives reasons enough.

[UPDATE (August 15, 2012): The repossession rate is high among cars purchased through “Buy Here, Pay Here” used-car dealerships too. The LA Times has run a series of articles on such dealerships.]

[UPDATE (September 30, 2012): Governor Brown signs two bills regulating “Buy Here, Pay Here” used-car dealerships.]

[UPDATE: (June 7, 2015): For more on automobile title loans in California see this LA Times article: “More title lenders are snagging unwary borrowers in cycle of debt.”

   Professor Martin explains:

“A title loan is a high-interest, deeply over-secured, consumer loan, in which the consumer uses an unencumbered automobile as collateral for a non-purchase money loan. Title loans are made based solely on equity in a car. If a customer has insufficient income to pay the payments under the loan, typically interest-only payments at 300% per annum or more, the lender repossesses the vehicle, many of which have GPS trackers installed for this purpose. Not surprisingly, the repossession rates for title loans are higher than regular auto repossession rates, as well as home foreclosure rates. Prior to repossession, lenders recover their principal many times over. For example, one customer paid over $10,000 on her $4000 loan. Another paid over $11,000 on a loan of $1500.”

   Professor Martin blogged about her article at Credit Slips and lists two important characteristics of the loans the article failed to mention which provides additional reasons to avoid title loans like the plague:

“First, it seems that the process of repossessing and then having a customer redeem the vehicle is extremely profitable for the lender and very expensive for the client . . . . ¶ Second . . . the loans can only be paid off in one lump sum.  But I kid you not, folks, that is so wrong!  Reality check:  You can’t pay them off at all!  I do not mean that the customer cannot come up with the money.  What I mean is that the lenders find ways to keep you in the loans even if you show up with the total amount of funds owed.  They will not take checks from banks.  Even if you seemingly pay it off in full, they come up with charges they missed and keep asking for more.  They refuse to release titles.  They try to confuse customers, do not listen to customers, by hook or by crook, they simply will not take the principal to pay off the loan.”

   Title loan lenders are licensed under the Finance Lenders Law in California at Financial Code § 22000 et sq. Interest rates are virtually unlimited for secured loans of $2,501 or more, so lenders do not make loans for less. I suspect the borrowers’ experience in California is not much different than in New Mexico. The loans are extremely expensive and frequently result in repossession and ultimate loss of the vehicle.