Auto-Title Lending: What it Means for You

Marketed as a quick and easy solution when you are in a money pinch, auto-title loans are a type of predatory lending that uses the borrower’s car as collateral. Lenders assess the value of the car when determining the loan, however, the customer’s ability to repay the loan is not taken into account. The repayment period can vary between 10 days, a month, or longer and interest can run as high as a 300% APR.  Furthermore, lenders make about $2 billion worth of loans while customers pay more than $4 billion in fees making the auto-title loan market about the same size as the market of payday loans. The Center for Responsible Lending reports that the average borrower renews their loan 8 times and on a $500 loan, this average customer will pay back $650 in interest over eight months; the principle borrowed will be in addition.  Additionally, they estimate that 1 in 6 borrowers incur repossession fees on top of loan fees.  If a customer’s car is repossessed then how could they get to work or get groceries or take their kids to school? These quick and easy loans are only quick and easy in perpetuating a debt trap for customers worsening their financial situation.

Michigan is one of 29 states that do not allow auto-title lending. However, their legality was jeopardized when Senate Majority Leader Randy Richardville and Representative John Walsh proposed bills that would add a loophole to the state’s 1917 Pawnbrokers Act. Under the proposed bill, Detroit News describes that pawnbrokers could add a 20 percent monthly usage fee for vehicles, meaning that a 12-month, $1000 auto title loan would cost the borrower $2760 in interest, on top of the original $1000 borrowed. The APR would eventually total out to be 276% and endanger Michigan’s must vulnerable citizens. In a state were there is very limited access to public transportation in the urban, rural, and suburban areas, repossession of a car would be devastating.

CEDAM circulated a letter signed by more than 50 organizations opposing the bill. Even the state pawnshop industry was not on board with the bill. Although the bill has been killed, it is expected it will be brought up again next term – maybe in another form.

To help identify and prevent predatory auto-title loans, the Center for Responsible Lending provides the following information:

How to identify an auto-title loan

  • High annual interest rates
  • Quick due date
  • Car used as collateral
  • Debt trap

Protect yourself from these high interest rate loans:

  • Pay attention to the APR
  • Look at all options and alternatives
  • Keep a savings account
  • Stay clear from all predatory loans
  • Avoid forced arbitration clauses
  • Advocate for a 36% cap on interest rates

Solutions to auto-title lending:

  • Ask family and friends for a loan
  • Look into other alternatives such as banks and credit unions
  • Ask for an advancement payment from your employer

**Information taken from Center for Responsible Lending and Detroit News