Popular auto title loans offer fast cash at steep price
- December 15, 2012
Laura A. Bischoff of the Dayton Daily News wrote this solid piece on auto-title lending in Ohio, drawing on her own investigation as well as our research on the issue. Our report on the issue shows that this new (in Ohio, at least) of payday-like lending is starting to catch on in Ohio. High fees and interest rates mean it may be even worse than “traditional” payday lending, and could cost consumers their cars if they default on the loan.
Long popular in states such as Texas and Illinois, auto title lending is spreading across Ohio with more than 20 stores in the Miami Valley alone. Lenders promise 30-day loans of $100 up to $10,000, using the title to the borrower’s vehicle as collateral.
An employee at a newly opened LoanMax store at 2601 S. Smithville Road in Dayton told an undercover Daily News reporter that someone taking out a $400 loan would have to pay back $536 after 30 days. On a $1,000 loan, a borrower would have to repay $1,325, the employee said.
If those fees and interest were calculated as an annual percentage rate, both loans would have an effective APR of around 400 percent.
According to the story, “In Texas, an average of 93 people a day have their cars repossessed by auto title lenders, which works out to be a 6 percent repossession rate, according to 2012 data from the Texas Office of Consumer Credit Commissioner.”
“The payback time is extremely short and the interest rates are extremely high,” said David Rothstein of Policy Matters Ohio, a Cleveland-based left-leaning think tank. “And there is this new dimension: you could lose your car.”
Amy Voshall of Fairborn took out a $550 title loan this fall but claims the terms weren’t clear before she signed the paperwork. She signed the papers and now faces almost $1,400 in payments over six months. She has already missed one payment and is afraid she will lose the 1995 Chevy Blazer that gets her to school and takes her disabled son to doctor appointments.
“I was in a bind and I needed the help (to pay rent), and now I’m in a worse situation than I ever was,” she said.
Voshall planned to repay the loan when she received an adjustment to her disabled son’s Supplemental Security Income check. But she said she used that money instead to pay overdue utilities, rent and bills.
“It’s heartbreaking for me to look at my kids and say it’s a choice — either we have a car, or you have a Christmas,” she said. “That’s where I’m at right now. As a mom, that just rips my heart out.”
The story goes on to give an explanation by the Ohio Consumer Lenders Association, which represents payday lenders, that “auto equity loans fill an important gap in the credit market for ‘worthy borrowers’ who own cars but have difficulty getting a credit card, bank loan or home-equity line of credit.”
“There will always be critics of new consumer financial products,” the association said in a written statement to the Daily News. “In our mind customer demand is the ultimate determinant for establishing the worth and viability of a product. Without demand, a product would not exist very long in a marketplace. The laws of economics and behavior over time will determine the success and value of this product.”
Bischoff notes that “Ohio does not collect data on how many auto title loans are being made, what the loan terms are, what the default rate is or other relevant information. The state doesn’t have a specific licensing category for these types of loans either.”
The Department of Commerce referred questions about auto title loans to the industry itself. The Ohio Consumer Lenders Association referred the same questions back to the Department of Commerce.
Critics say lenders are doing an end-run around the state’s 2008 Short Term Loan Act, which was heavily opposed by the payday lending industry and overwhelmingly approved by voters in a statewide referendum.
Yolanda Walker, spokeswoman for Cash America, said payday lenders eschew that statute because “the interest rate is so low it is not feasible for us to do business.”
The piece describes legal loopholes used by payday and auto-title lenders to sidestep limits imposed by the Short Term Loan Act, passed to stop abuses by the payday industry. Payday and auto-title lenders are using the Second Mortgage Loan Act or the Credit Services Organization Act because they permit fees in addition to interest charged. Neither of these laws was designed to regulate payday-type lending.
Some payday lenders went out of business, but many just found a way around the lending ceiling. LoanMax, which is registered as a CSO, advertises “loans up to $10,000” on its website with rates “up to 50% less!” A menu on Frequently Asked Questions covers areas such as “What is a title loan?” and “How much can I borrow?” but doesn’t say what the rates are. To a question about whether borrowers can lose their car, the website says, “Unlike other lenders who might be more interested in repossessing the vehicle, LoanMax is more interested in working out a payment arrangement so you can keep your car.”
Such arrangements can get expensive. When the Daily News undercover reporter visited the LoanMax store on South Smithville, the employee outlined a dizzying array of potential fees. Asked what would happen if a loan wasn’t repaid in 30 days, the employee said as long as a borrower made a “minimum payment” roughly equal to the fees and interest (paying $142 on the $400 loan), they could essentially start over with a new loan of the same amount.
The employee pointed out that the minimum payment would only pay down $6 of the principal on the loan, then added that “you can do that as many times as you need to.”
If a borrower did that three times, the dollar amount on fees and interest would be higher than the original loan amount.
The cost is more steep for those who can’t pay off the loan or make the minimum payment.
“If you don’t pay either one of these, there’s 30 days before we would repo the car,” the employee said.
In an interview last week, a manager at the Dayton LoanMax store confirmed the information the employee provided to the undercover reporter.
The story goes on to describe other options for short-term loans, through banks and credit unions, as well as the possibility of a legal challenge — some of the practices may violate Ohio law.