CAR TITLE LOANS: The new PREDATORY LENDING

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The Problem:
Car title loans have extremely high interest rates (up to 360%) for borrowers willing to sign over their car title as collateral. Victims of this type of predatory lending are often left without transportation when their car is repossessed or they become caught in an all too common cycle of debt. Lenders operate under a state statute that deregulates open-ended credit, which means they avoid interest rate limits, maturity dates, and full disclosure requirements. Currently, car title lenders are not yet regulated by the Virginia Bureau of Financial Institutions, so accurate data about their locations and practices is practically unavailable.

Background:
∑ With no credit check, the borrower can quickly obtain a loan (usually less than $1000) by exchanging their car title and an extra set of keys to their vehicle as collateral. The borrower makes the first payment after 15 days and then every 30 days thereafter. The borrower pays one percent interest per day and must pay a minimum of ten percent of the loan principal with each payment, excluding the first payment. While the loan can be paid off early with no penalty, the vehicle can be repossessed with only one missed payment.

Example: Making the minimum payments for two and a half months, a borrower would have paid $374 on a $400 loan and still owe $300.

∑ Implications and Consequences:

Astronomical Interest Rates - A car title loan in Virginia typically carries an annual percentage rate of 360%, which works out to $125 of interest for a one-month loan of $500. In addition, borrowers must pay fees, including an “annual membership fee” and another fee for having a lien recorded on the car title. For example, Fast Auto Loans, a lender in Hampton Roads, charges a $50 membership fee and a $6 car title fee.

High Repossession Rate - With only 15 days to make the first payment on a loan, borrowers are at risk of repossession, which can occur after one missed installation.

Access to Transportation - Most Virginians are forced to rely on their cars as a means of transportation to and from work, school, healthcare, etc. Without a vehicle, victims of car title loans often lose their jobs because of missed work, and consequently, are unable to meet other basic needs.

Inability to Escape the Loan – Victims remain in a state of “financial emergency” since the loan terms are so short. The interest quickly mounts as paying the loan off with a balloon payment is commonly impossible.  

Loss of Equity - Car title loans put a vehicle asset at risk. 

The Solution:
Virginia’s open-ended credit statute was not intended for car title loans. Legislation capping interest rates on car-title loans is necessary to prevent any more Virginians from falling into a cycle of debt or losing their means of transportation.

In Iowa, Representative Joe Hutter is urging delegates to approve the Senate proposal to limit the interest rates charged by car title loan operations to 21 percent. The legislation came out of results of several studies, one of which found that more than 1,000 families had lost their means of transportation during the preceding nine months in which the new form of predatory lending had been available in Iowa.

Virginia should follow Iowa’s lead and become the next state to protect consumers from this harmful form of predatory lending. Several legislators are already on board:

HB 325 (Morgan): This would impose a 36% APR ceiling on all car title loans. Although 36% APR is still high, it would represent dramatic progress over the current 360% APR charged by lenders in the state.

SB 598 (Bell): Includes some complicated provisions, but overall is an improvement to the current lack of regulation. Makes car title loans closed-end products and caps the interest at 20% per month for the first 2 months and 3% for the balance of the term (not to exceed 12 months). Current rates are about 25% per month for an indefinite loan term. This bill also sets the maximum loan amount at 50% of the value of the motor vehicle, which coincides with the current practice standard.

During the 2006 General Assembly session, the faith community supports passage of this legislation. Protections must be in place to prevent the situation of car title lending from growing worse in Virginia.

Center Priorities (.pdf)

Bulletin Inserts
Child Support (.pdf)
Environment (.pdf)
Housing Trust (.pdf)
Indigent Defense (.pdf)
Payday Lending (.pdf)
Minimum Wage (.pdf)

Advocacy Resources
Advocacy Guide (.doc)
Advocacy Portal (link)
Lending Info. (.ppt)
Richmond Map (.pdf)

For Small Groups
Eco-Stewardship (link)
Prayers for Creation (link)
Poverty Diet (link)

Policy Briefs
EITC (.doc)
TANF Child Support (.doc)
Payday Loans (.doc)
Healing Creation (.doc)
Child Ombudsman (.doc)
Affordable Housing (.doc)
Indigent Defense (.doc)
Minimum Wage (.doc)
Wage & EITC (.doc)
VA Tribes (.link)

Actions
Lending Petition (link)
Title Petition (link)
Wage Petition (link)

Reports
Budget Analysis (.pdf)
Food Stamps (.doc)
Lottery Study (link)

FAQ's (link)

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