High-Rate Auto Title Loans a Risky Move for Borrowers

Even with a full-time job, Shanell White found herself in dire financial straits. Her 12-year-old car needed new brakes. On top of rent and college courses, she became legal guardian for her infant niece, which meant diapers, baby food and $300 a month for day care.

With no savings and poor credit, the single Sacramento, Calif., resident couldn’t qualify for a conventional bank loan, and her monthly paycheck was stretched to the snapping point.

“It was an emergency. I had no savings, and was going negative every month,” said White, 38, a program specialist for the California Department of Corrections and Rehabilitation.

Desperate for cash, she borrowed against her only asset: her car. Answering an online ad in January 2009, White took out a $3,900 loan on her aging white Lexus SUV, signing a three-year contract for monthly payments of $290. In a box above her signature, the loan’s terms were plainly stated: An annual percentage rate of 79.9 percent and total finance charges – over three years – of $6,541.44.

By the time her 36-month contract was nearing completion, White had paid more than $11,000, including an extra $1,100 in fees to get her Lexus back after it was repossessed for several late payments. But when she went to make her final payment, White was stunned to discover that – with interest, penalties and a balloon payment – she still owed another $3,714. She declined to pay. Ultimately, the car was repossessed a second time, in August 2012.

White is now suing the loan company, Wilshire Commercial Capital of Los Angeles. Efforts to get a comment from a Wilshire representative were unsuccessful.

A growing number of title loan companies, such as Wilshire, are charging high interest rates to consumers that are desperate for cash. California is one of a minority of states that allow such loans at all.

Nearly 100 companies with multiple locations are licensed in California to issue auto title loans ­– and the number is rising, according to the state Department of Business Oversight. Last year, there was a 35 percent jump in the number of lenders offering title loans, from 59 companies in 2011 to 80. Thus far in 2013, another 19 have been licensed.

In 2011, the most recent year for DBO data, Californians took out 38,148 auto title loans, averaging $3,500 each.

Auto-title loan ads populate the internet and airwaves, with catchy names like “INeedCashNow.net,” “PinkSlipLoan.com” or “123FundMe.com.”

Their sales pitches are typically similar: Get fast cash with no credit check, based on the value of your vehicle. Bad credit or bankruptcy? Not a problem. No long-term job history? No worries.

Consumers hand over their cars’ pink slips as collateral. If they default, their vehicle is repossessed and sold by the lender.

“It’s outright predatory lending,” said Bryan Kemnitzer, a San Francisco consumer attorney, who started getting complaints several years ago about Californians losing their cars to auto-title lenders.

Auto-title lenders say they’re providing a needed consumer service, offering cash loans to people with no other options because of poor credit or no access to traditional bank loans. They also say the risky nature of the loans necessitates charging high interest rates.

Considered “subprime financial products” by state regulators, auto-title loans have been targeted by consumer groups that seek to limit the triple-digit interest rates or ban the loans altogether.

“The biggest problem is that you are putting such a valuable asset – your car – at risk. Particularly in California, where public transportation is not readily accessible, having a car isn’t a luxury,” said Maria Asturias, of the Center for Responsible Lending in Oakland, Calif. “It’s a necessity to keep your job, get kids to school, drive to medical appointments.”

Nationally, only 21 states allow auto-title loans, and some of those, like Florida, have capped the allowable interest rates. The U.S. military also bans lenders from charging more than 36 percent interest on auto-title loans to service members.

Opponents of auto-title loans advise consumers to use them only as a last resort.

“These products are dangerous for people,” said Asturias, who urges cash-strapped consumers to look at alternatives, such as: borrowing from friends or family; obtaining a loan from a bank or credit union; getting money-managing help from a credit counseling agency; or trading in the vehicle for a less expensive model, rather than borrowing against it.

Auto Title Loans

• What they are: Short-term, high-interest loans that use your vehicle as collateral.
• How they work: Typically, borrowers must own the vehicle outright. No credit checks, and minimal proof of income, are required. The borrower hands over the vehicle’s pink slip until the loan is repaid.
• Typical borrower: Takes out a 30-day loan of $1,042 that’s renewed eight times, paying back $3,391 – triple the amount borrowed.
• Where offered: 29 states and Washington, D.C., do not allow auto-title loans, or severely limit interest rates. A number of online lenders operate offshore or on Indian tribal lands, where they’re not subject to U.S. regulations.