How title lending works
This story was originally published by ProPublica.
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Consumers across the country pledge the titles to their vehicles in order to obtain quick cash through title loans. The title-lending industry, which caters to people who are often written off as credit risks by traditional lending institutions, maintains that it provides a valuable financial service. But many consumer advocates see title lending as predatory: The loans typically carry high costs and terms that make the debt difficult to pay off. If borrowers default, they can lose their car, causing even more harm.
ProPublica spent months reporting on how title lending works as part of a project with The Current, a nonprofit newsroom based in Georgia. We found that, even though Georgia banned high-interest payday loans, it carved out a loophole for title lending that puts borrowers at risk.
What Is a title loan?
A title loan allows people to use their vehicle’s title as collateral for a short-term loan, which typically comes with a high interest rate. In a title loan, the borrower and lender sign an agreement under which the lender places a lien on the title of the borrower’s vehicle. If the borrower does not pay back the amount of the loan, along with interest and fees, the vehicle becomes the property of the lender, who can move to repossess and sell the vehicle and even charge the borrower for the cost incurred by the lender to retrieve the car. In two states — Georgia and Alabama — the contract is referred to as a “title pawn” because title lenders operate under pawn shop statutes.
In Georgia, this allows title lenders to charge triple-digit interest rates and exempts them from the usury laws and oversight that govern the state’s other subprime lenders. Title pawn contracts are also not set up like home mortgages, which offer customers a set schedule to pay off their loans. Critics say this practice creates a debt trap — which is profitable for companies and bad for consumers, especially those in communities of color, where a disproportionate number of Georgia’s title pawn stores are found.
How Do title loan contracts work?
What is the interest rate on a title loan?
The maximum interest rate on a title loan varies from state to state.
Alabama allows 300% annual percentage rates, and Texas also allows triple-digit rates. In Georgia, the interest rate can be as much as 187.5% annually, far above the state’s usury caps — no more than 60%, including fees — which are imposed on other types of lenders.
At least 20 states, including Illinois and California, have capped interest rates for title loans at 36% or less per year. With interest rate caps in place, most title lenders have ceased operations in those states.
Some states also require that lenders verify the borrower’s ability to repay before issuing a loan.
It is important when making payments on a title loan to understand the terms of the contract. Some title loans are structured so that the payments only cover interest and fees, meaning that borrowers may not be paying down the loan itself. In addition to the interest rate, you may also be charged a fee for the title loan transaction.
How long does it take to pay off a title loan contract?
It takes many borrowers multiple months or even years to pay off the debt. A 2019 survey by the Consumer Financial Protection Bureau found that, of consumers who had taken out a title loan in the previous six months, 83% were still paying it off.
In Georgia, while title pawn contracts are structured to last for only 30 days, they can be renewed indefinitely.
Some states have limits on how many times a title loan can be renewed or require that the principal be paid down as a condition of renewal. But Georgia lacks such limitations.
Take the case of Robert Ball, a Savannah, Georgia, resident who got a title pawn for $9,518 in 2017. He made his monthly payments on time for two years — paying more than $25,000 — but that money only covered the interest. Meanwhile, his principal hadn’t budged.
Ball got his title pawn from TitleMax, the nation’s largest title lender, which relies on contracts being renewed as a key source of revenue.
In 2009, the then-president of TitleMax’s parent company, TMX Finance, wrote in an affidavit that, “The average thirty (30) day loan is typically renewed approximately eight (8) times, providing significant additional interest payments.”
What happens if I can’t pay off my title loan?
You should review the specific terms of your title loan agreement to understand what may happen.
Generally, if you can’t pay off a title loan, the lender has the right to repossess and sell your vehicle. In Georgia, the lenders can keep the full amount your vehicle sells for, even if it exceeds the amount you owed.
Other states have different rules. In some states, the lender may be able to pursue you for any remaining balance if the sale amount is less than what you owed. The lender may also be obligated to return the surplus of the sale if it is more than what is owed on your loan.
In Georgia, title pawn agreements are “non-recourse,” which means the lender can’t pursue you personally for anything besides the right to take your vehicle. The state attorney general’s office accused a TitleMax rival, Tennessee-based First American Title Lending of Georgia, of threatening customers with criminal arrest warrants. First American settled with the state and paid a fine, but admitted no wrongdoing.
What are the problems with title loans?
The high interest rates on title loans make them extremely difficult to pay off. Lorena Saedi, a Georgia bankruptcy lawyer and managing partner of Saedi Law Group in Atlanta, often sees clients who are struggling with debt from a title loan and estimates that about a third of her bankruptcy cases include title lenders.
If your title loan is renewed multiple times, you often end up paying more in interest than what you have received in principal. Even after paying exorbitant rates month after month, you can still lose your vehicle if you can’t pay off both the interest and the principal on your loan. Additionally, you cannot sell your vehicle until your title loan is paid off, unless a buyer is willing to pay off the loan, because of the lien that the title lender holds.
Are there alternatives to title loans?
Instead of a high-interest loan, a federal agency called the National Credit Union Administration suggests options such as contacting your state or local government to ask about emergency assistance programs, talking to creditors about negotiating for more time on bills, or asking for an advance from your employer. For members of credit unions, the agency also suggests researching a form of borrowing called payday alternative loans, which have lower fees.
The Consumer Protection Division of the Georgia Attorney General’s Office similarly recommends that Georgians in need of emergency finance consider multiple alternatives, such as asking a relative for money or approaching a credit union, before turning to subprime financial products like title pawns.
How can I get out of a title loan contract?
Other than paying off the debt, there are few ways to get out of a title loan contract. Some companies offer title loan buyouts, in which a lender pays off your original loan in exchange for a new loan. But while this may help you change the interest rate you owe, it does not wipe out the original debt — it simply replaces the old debt with a new one.
Filing for bankruptcy may help in some states, but not everywhere. Because of a 2017 federal appeals court decision, debts owed to title lenders operating under pawn shop statutes don’t have to be wrapped into a court-approved settlement like debts to other creditors. Instead, title lenders have to be paid back first and at the original terms of the contract.
Consumers who feel taken advantage of by title lenders in Georgia have a narrow avenue for pursuing their complaints.
At the state level, the website for the Consumer Protection Division offers straightforward guidance: If customers think their title lender violated the law, they “should notify the local criminal authorities for the city or county in which the title pawn company is doing business.” However, outside of metro Atlanta, few law enforcement bodies in Georgia’s 159 counties have robust white-collar or financial crime departments or an investigator who specializes in such crimes.
The Consumer Financial Protection Bureau, the federal agency created to protect consumers from financial organizations in the wake of the 2008 global financial crisis, launched an investigation into TMX Finance in part due to consumer complaints amassed by Georgia Watch, the state’s most prominent consumer advocacy group. The company denied any wrongdoing, but the agency ruled in 2016 that the company had deceived customers in Georgia, Alabama and Tennessee by masking the true cost of title loans. This did not affect individual loans, however, and the company’s $9 million fine was not paid out as restitution for borrowers, instead going into an agency-controlled fund.
For our November story, TMX Finance did not respond to repeated requests for comment on a detailed list of questions about the company’s operations.
This article was produced for ProPublica’s Local Reporting Network in partnership with The Current. Sign up for Dispatches to get stories like this one as soon as they are published.