"Will We Never Learn?" - Meet Subprime Auto 'Title Loans': 2014's Home ATM

Tyler Durden's picture

The car is at the center of the biggest boom in subprime lending since the mortgage crisis, and The NY Times reports, similar to how a red-hot mortgage market once coaxed millions of borrowers into recklessly tapping the equity in their homes, the new boom is also leading people to take out risky lines of credit known as title loans. Will we never learn?!!

 

 

“Turn your car title into holiday cash,” TitleMax, a large title lender, declared in a recent television commercial, showing a Christmas stocking overflowing with money.

But as The NY Times reports, the risky lines of credit - known as title loans - are, roughly speaking, the home equity loans of subprime auto.

In these loans, which can last as long as two years or as little as a month, borrowers turn over the title of their cars in exchange for cash — typically a percentage of the cars’ estimated resale values.

 

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More than 1.1 million households in the United States used auto title loans in 2013, according to a survey by the Federal Deposit Insurance Corporation — the first time the agency has included the loans in its annual survey.

 

Title loans are an increasingly prevalent form of high-cost, short-term credit in subprime finance, as regulators in a number of states crack down on payday loans.

 

For many borrowers, title loans, also sometimes known as motor-vehicle equity lines of credit or title pawns, are having ruinous financial consequences, causing owners to lose their vehicles and plunging them further into debt.

The rates are stupendous...

A review by The New York Times of more than three dozen loan agreements found that after factoring in various fees, the effective interest rates ranged from nearly 80 percent to over 500 percent. While some loans come with terms of 30 days, many borrowers, unable to pay the full loan and interest payments, say that they are forced to renew the loans at the end of each month, incurring a new round of fees.

As regulations backfire with unintended conseuqnces...

The title lenders are seizing upon a broad retrenchment among banks, which have become wary of making loans to borrowers on the fringe of the financial system. Regulations passed after the financial crisis have made it much more expensive for banks to make loans to all but the safest borrowers.

 

The title lenders are also benefiting as state authorities restrict payday loans, effectively pushing payday lenders out of many states. While title loans share many of the same features — in some cases carrying rates that eclipse those on payday loans — they have so far escaped a similar crackdown.

 

In 21 states, car title lending is expressly permitted, with title lenders charging interest of up to 300 percent a year. In most other states, lenders can make loans with cars as collateral, but at lower interest rates.

We conclude with one anecdotal example that sums it all up...

The rusting 1994 Oldsmobile sitting in a driveway just outside St. Louis was an unlikely cash machine.

 

That was until the car’s owner, a 30-year-old hospital lab technician, saw a television commercial describing how to get cash from just such a car, in the form of a short-term loan.

 

The lab technician, Caroline O’Connor, who needed about $1,000 to cover her rent and electricity bills, believed she had found a financial lifeline.

 

“It was a relief,” she said. “I did not have to beg everyone for the money.”

 

Her loan carried an annual interest rate of 171 percent. More than two years and $992.78 in debt later, her car was repossessed.

 

“These companies put people in a hole that they can’t get out of,” Ms. O’Connor said.

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Americans need moar and will do anything for it... and as Steve Liesman says - credit is the briddge between work and play (or no work and moar play)... and is the backbone of America. What a sad joke!!

Because many lenders make the loan based on an assessment of a used car’s resale value, not on a borrower’s ability to repay that money, many people find that they are struggling to keep up almost as soon as they drive off with the cash.

 

As a result, roughly one in every six title-loan borrowers will have the car repossessed, according to an analysis of 561 title loans by the Center for Responsible Lending, a nonprofit in Durham, N.C.

 

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The title lending industry, perhaps more than any other facet of subprime auto lending, thrives because of the car’s importance.

 

The threat of repossession turns the borrower into an annuity for the lenders,” said Diane Standaert, the director of state policy at the Center for Responsible Lending.

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“It is a form of indenture,” said Robert Swearingen, a lawyer with Legal Services of Eastern Missouri, adding that “because of the threat of repossession, they can string you along for the rest of your life.”

 

“This is nothing but government-authorized loan sharking,” said Scott A. Surovell, a Virginia lawmaker who has proposed bills that would further rein in title lenders.

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Which makes us wonder... if "everything is awesome", why are so many Americans in such desperate need for short-term cash at whatever cost? Silly question really.