Lenders call them many things, car pawns, sale leasebacks and motor vehicle equity lines of credit are among them, but what they actually are is a small loan secured by a vehicle, a car title loan, which the borrower owns outright. Advertisements for these car title loans target those individuals with low income and bad credit. Lender locations target military personnel in particular. The Consumer Federation of America (CFA) compiled a survey of car title loan providers and the results show that this is a loan type to be avoided if at all possible. Most states do not protect consumers from car title loans or the lenders use legal loopholes to avoid the states consumer protection laws. It is up to the consumer to protect him/herself.

Facts and Fees

When applying for this type of loan, borrowers must sign over the car title to the lender and provide the lender with a spare set of keys. There are various fees associated with car title loans. The most common is a fee to file a lien against the borrower’s car. Other charges include late fees, processing fees, document and origination fees, car club fees, required roadside assistance fees and membership fees. Borrowers are generally required to repay the entire loan within one month or pay a roll-over fee. Among companies surveyed who provided answers to the CFA, the average cost to borrow $500 was $125. This is equivalent to an annual percentage rate (APR) of 300%, but the APR range for car title loans is from 24% to 651.79%. On the average, lenders repossess approximately 5% of the cars securing these loans, because lenders do not consider a person’s ability to repay the car title loan.

Options for Military Personnel

Military personnel have certain options not available to other consumers. Army, Navy, Air Force, Marines and Coast Guard all have services or societies which provide interest free loans or grants to active duty and retired personnel and their dependents. These loans are for short term emergencies, not vacations or other unnecessary expenditures, but in most cases people who apply for these loans are in emergency situations or they would not risk losing their car.

There is a sad story involving a Naval Petty Officer who borrowed $1700 from one of these car title lenders. He needed the money to make his mortgage payment. When he could not make the balloon payment at the end of the month, he was required to pay a $370 roll-over fee in order to avoid repossession. His car was worth around $6000 so he paid the roll-over fee that month and continued paying it for months. Finally, after paying a total of $7400 to borrow $1700 and still owing the initial $1700 plus interest, he reported the situation to his commanding officer. His commanding officer was able to help him get out of this “debt trap” and wrote an angry letter to the mayor of the town, but there was nothing anyone could do. Everything the car loan company did was perfectly legal. The CFA believes that these companies target military personnel, by locating the stores near military bases. In Virginia, over half of the LoanMax (a car-title loan company) stores in the state are in the Hampton Roads area, home of Navy, Air Force and Army bases.

Options for Anyone

Most banks will offer loans to consumers who have collateral like a paid-off car title even if they have a less than perfect credit rating. It is hard to imagine a bank that would not loan $1700 on a vehicle valued at $6000. A bank loan will have reasonable monthly payments, reasonable interest rates and the added benefit of improving the borrower’s credit rating when the loan is paid off. If a consumer has no credit or bad credit and no bank account or can not for some other reason borrow from a bank or credit union, experts advise that he should borrow from family or friends, ask creditors for additional time, ask his employer for an advance, try anything in order to avoid putting his/her car at risk and ending up in a “debt trap”.