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Land Of The Debt Serf: How "Auto Title Loan" Companies Ruthlessly Prey On America's Growing Underclass

Submitted by Mike Krieger via Liberty Blitzkrieg blog,

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Short-term lenders, seeking a detour around newly toughened restrictions on payday and other small loans, are pushing Americans to borrow more money than they often need by using their debt-free autos as collateral.

 

Their hefty principal and high interest rates are creating another avenue that traps unwary consumers in a cycle of debt. For about 1 out of 9 borrowers, the loan ends with their vehicles being repossessed…

 

But Jordan said it wouldn’t make a loan that small. Instead, it would lend her $2,600 at what she later would learn was the equivalent of 153% annual interest — as long as she put up her 2005 Buick Rendezvous sport utility vehicle as collateral.

 

State law limits payday loans to $300, minus a maximum fee of $45. California also caps interest rates on consumer loans of less than $2,500 on a sliding scale that averages about 30%. Consumer loans above $2,500 have no interest rate limit.

 

For that reason, essentially all auto title loans in the state are above that level, according to the state’s business oversight department.

 

– From the excellent LA Times article: More Auto Title Lenders are Snagging Unwary Borrowers in Cycle of Debt

Last week, I published an article highlighting how the use of “alternative financial services” has continued to increase despite the so-called economic “recovery.” These services include payday loans, refund-anticipation loans, pawnshops, rent-to-own services, and the little known, but recently surging, category called auto title loans. Here’s an excerpt from that post, titled Use of Alternative Financial Services, Such as Payday Loans, Continues to Increase Despite the “Recovery”:

Families’ savings not where they should be: That’s one part of the problem. But Mills sees something else in the recovery that’s more disturbing. The number of households tapping alternative financial services are on the rise, meaning that Americans are turning to non-bank lenders for credit: payday loans, refund-anticipation loans, pawnshops, and rent-to-own services.

 

According to the Urban Institute report, the number of households that used alternative credit products increased 7 percent between 2011 and 2013. And the kind of household seeking alternative financing is changing, too.

 

It’s not the case that every one of these middle- and upper-class households turned to pawnshops and payday lenders because they got whomped by an unexpected bill from a mechanic or a dentist. “People who are in these [non-bank] situations are not using these forms of credit to simply overcome an emergency, but are using them for basic living experiences,” Mills says.

In that article, the category of auto title loans was just a minor blip on the radar, but it seems poised to take a growing share of the legalized American loanshark market.

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Yesterday, the LA Times published an excellent article on the topic of auto title loans describing what they are, and how they are being used to prey on America’s growing underclass of debt serfs. We learn that:

Cash-strapped consumers are being shown a new place to find money: their driveways.

 

Short-term lenders, seeking a detour around newly toughened restrictions on payday and other small loans, are pushing Americans to borrow more money than they often need by using their debt-free autos as collateral.

 

So-called auto title loans — the motor vehicle version of a home equity loan — are growing rapidly in California and 24 other states where lax regulations have allowed them to flourish in recent years.

Think about how troubling this is for a second. In the run-up to the last crisis, Americans borrowed on their home equity and used the proceeds to remodel kitchens, etc. Now these same Americans are so completely broke, the only asset they can borrow against is their cars, and they are desperately using the money to purchase groceries, pay cable bills, etc. Thank you Ben.

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Even worse, more than 10% of these debt serfs end up losing their cars. What will they end up borrowing against after the next crisis, their organs?

Their hefty principal and high interest rates are creating another avenue that traps unwary consumers in a cycle of debt. For about 1 out of 9 borrowers, the loan ends with their vehicles being repossessed.

 

“I look at title lending as legalized car thievery,” said Rosemary Shahan, president of Consumers for Auto Reliability and Safety, a Sacramento advocacy group. “What they want to do is get you into a loan where you just keep paying, paying, paying, and at the end of the day, they take your car.”

 

Jordan, 58, said she needed about $400 to help her pay bills for cable TV and other expenses that had been piling up after her mother died.

 

She turned to one of a proliferating number of storefront title lenders, Allied Cash Advance, which promises to help “get the cash you need now.”

 

But Jordan said it wouldn’t make a loan that small. Instead, it would lend her $2,600 at what she later would learn was the equivalent of 153% annual interest — as long as she put up her 2005 Buick Rendezvous sport utility vehicle as collateral.

Nice to see how the 0% interest rate Ben Bernanke and his fellow criminals at the Federal Reserve instituted is trickling down so generously to average Americans.

Why would the company want to lend her much more money than she needed? The key reason is that California has no limit on interest rates for consumer loans of more than $2,500, and it otherwise doesn’t regulate auto title loans.

 

Six months later, unable to keep up with the loan payments, Jordan said, she was awakened at 5 a.m.

 

“My neighbor came pounding on my door and said, ‘They’re taking your car!'” she recalled.

 

In California, the number of auto title loans jumped to 91,505 in 2013, the latest data available, from 64,585 in the previous year and 38,148 in the first year, 2011, that was tracked by the state Department of Business Oversight.

 

The study, one of the first comprehensive looks at the issue, found that the average loan was for $1,000 and a typical borrower paid $1,200 in fees a year on top of the principal.

 

Loan sizes and fees vary by state, but the most common annual percentage rate on a one-month loan was 300%, according to Pew, which surveyed borrowers and analyzed regulatory data and company filings.

 

“Your auto is in many cases one of your only assets. Be careful signing away the ownership of that car for some short-term cash,” said Jan Lynn Owen, the state’s commissioner of business oversight.

 

The terms of auto title loans vary widely by state. But they all center on using the vehicle’s title, also known as the pink slip, as collateral. The borrower usually must have full ownership of the vehicle, and its value must be well above the amount of the loan.

 

Because the loan is secured by the vehicle, lenders often don’t consider a consumer’s income or ability to repay. If the borrower falls behind, the car will be repossessed and sold to pay off the loan.

 

State law limits payday loans to $300, minus a maximum fee of $45. California also caps interest rates on consumer loans of less than $2,500 on a sliding scale that averages about 30%. Consumer loans above $2,500 have no interest rate limit.

 

For that reason, essentially all auto title loans in the state are above that level, according to the state’s business oversight department. Most range from $2,500 to $5,000. Of those, about 45% carried annual percentage rates of at least 100%, according to state data for 2013.

How can this practice be seen as anything other than predatory?

Meanwhile, the Fed continues to holds interest rates for financial oligarchs at 0%, patting itself on the back as America’s underclass grows and the oligarchy consolidates all wealth and power. Bernanke and his colleagues at the Federal Reserve have committed ongoing crimes against humanity, and nobody with any ability to stop it seems to care.

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For related articles, see:

The Road to Serfdom

Use of Alternative Financial Services, Such as Payday Loans, Continues to Increase Despite the “Recovery”

Just Another Tale from the Oligarch Recovery – $100 Million Homes Being Built on Spec

Pennsylvania Looks to Legalize Payday Loans by Calling Them “Mirco-Loans”

TBTF Banks Enter Payday Loan Business with 500% Interest Rates

Portrait of the American Oligarchy – The Very Troubling Income and Wealth Trends Since 1989