More auto title lenders are snagging unwary borrowers in cycle of debt – Los Angeles Times

Posted: Sunday, June 07, 2015

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.

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.”

Jennifer Jordan in the Central Valley town of Lemoore, Calif., lived that financial nightmare, though a legal glitch later rescued her.

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.

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.

“She never said anything about the interest or nothing,” Jordan said of the employee who made the loan in 2012.

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.

As a recent trend, auto title lending is taking off, according to data compiled over the last four years.

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.

Nationwide, more than 2 million people a year, on average, take out auto title loans, according to a study released in March by the Pew Charitable Trusts.

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