The rusty 1994 Oldsmobile sitting in an alley just outside St. Louis was an unlikely ATM. That was until the owner of the car, a 30-year-old hospital lab technician, saw a TV commercial describing how to get money from such a car, in the form of a short-term loan.
Lab technician Caroline O’Connor, who needed about $1,000 to cover her rent and electricity bills, believed she had found a financial lifeline. “It was a relief,” she said. “I didn’t have to beg everyone for the money.”
His loan carried an annual interest rate of 171%. More than two years and $992.78 in debt later, his car has been repossessed.
“These companies put people in a hole they can’t get out of,” O’Connor said.
Autos are at the center of the biggest subprime lending boom since the mortgage crisis. The market for loans to buy used cars is growing rapidly. And in the same way that a booming mortgage market once prompted millions of borrowers to recklessly exploit their home equity, the new boom is also prompting people to take out risky lines of credit called title loans.
In these loans, which can last up to two years or as little as a month, borrowers surrender title to their cars in exchange for cash – usually a percentage of the cars’ estimated resale value.
“Turn your car title into holiday money,” TitleMax, a major title lender, said in a recent TV commercial, showing a Christmas stocking brimming with cash.
According to a survey by the Federal Deposit Insurance Corporation, more than 1.1 million households in the United States used auto title loans in 2013.
For many borrowers, title loans have dire financial consequences, causing owners to lose their vehicles and put them further in debt. A review by the New York Times over three dozen loan agreements revealed that after factoring in various fees, effective interest rates ranged from nearly 80% to over 500%. While some loans come with 30-day terms, many borrowers, unable to pay the full loan and interest, say they are forced to renew loans at the end of each month, incurring a new set of fees.
Many people find that they find it hard to follow almost as soon as they walk away with the money. As a result, about one in six title loan borrowers will have their car repossessed, according to an analysis of title loans by the Center for Responsible Lending, a nonprofit organization in Durham, North Carolina.
“It’s nothing but government-sanctioned loan sharking,” said Scott A. Surovell, a Virginia lawmaker who has proposed bills that would further restrict incumbent lenders.
The lenders say they provide a source of credit for people who cannot get cheaper loans from banks. High interest rates, say lenders, are necessary to offset the risk that borrowers will stop paying their bills.
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The title lending industry thrives because of the importance of the car.
While people seeking title loans are often the most desperate — facing job loss, divorce, or family illness — lenders are willing to give them loans because they know most borrowers will pay their bill to keep their car. Some lenders don’t even bother to assess a borrower’s credit history.
“The threat of repossession turns the borrower into an annuity for lenders,” said Diane Standaert, director of state policy at the Center for Responsible Lending.
Unable to raise the thousands of dollars he needed to repair his car, Ken Chicosky, a 39-year-old army veteran, felt hopeless. He received a $4,000 loan from Cash America, a lender with a storefront in his Austin, Texas neighborhood.
The loan, which carries an annual interest rate of 98%, helped him fix the 2008 Audi he was relying on for work, but it caused his credit rating to drop. Chicosky, who is also attending college, uses some of her financial aid to pay her title loan bill.
Chicosky said he knew the loan was a bad decision when he got the first bill. It detailed how he would have to pay a total of $9,346 – a sum made up of principal, interest and other fees. “When you’re in a situation like that, you don’t ask a lot of questions,” he said.
Title lenders benefit as state authorities restrict payday lending, effectively kicking payday lenders out of many states. Although title loans share many of the same characteristics — in some cases, they carry rates that dwarf those of payday loans — they have so far escaped a similar crackdown.
In 21 states, car title lending is expressly permitted, with title lenders charging interest of up to 300% per year. In most other states, lenders can provide loans with cars as collateral, but at lower interest rates.
Johanna Pimentel said she and her two brothers have taken out several title loans.
“They’re everywhere, like liquor stores,” she said.
Pimentel, 32, had moved his family from Ferguson, Missouri, to a more expensive suburb of St. Louis that promised better schools. But after a divorce, she struggled to pay her rent.
Pimentel took out a title loan of $3,461 using his 2002 Suburban as collateral. After running late, she woke up one morning last March to find the car had been repossessed. Without it, she would not be able to continue running her daycare business.