I want to talk a bit about pay day and car title loans as I see them advertised all over the place of late. Indeed, the payday and auto title loan market is now an $89 billion industry with payday loans having grown almost 10% in the past year alone. What is this all about? The simple answer is short term, high interest loans. Sounds familiar, doesn’t it?
A payday loan is a loan that you commonly take out on a short-term basis. For example, let’s say that you need $500 this week. You go to a payday loaner and he would lend you the $500 (plus a fee for lending you the money as well.) You would then write a postdated check for the day you plan to pay back the loan, this day is usually your next payday, thus the term “payday loan.” In the event that you default on the loan, the lender can deposit the check, leaving you with bounced check fees and additional costs that the lender will most likely add on for failure to pay. The borrower will sometimes have the ability to defer the payment of the loan until the next payday, which will in turn cause him to incur inflated interest and additional fees.
As you can see, this loan can be detrimental to one’s financial well-being if not paid back on time. A car, or auto title loan, is a loan that you take out while using your car as collateral in the event that you default on the loan. The amount of the loan is usually based off of the car’s value (KBB or similar site.) The car must be fully owned, cannot be involved in any financing, or have any liens against it. Car title loans can carry interest rates anywhere from 25% to preposterous rates such as 100% per month.
Although loans over a 10% interest rate are considered usurious, payday loaners are often able to circumvent usury laws putting the borrower in an unfortunate situation. When you take these rates and turn them into APRs, they can reach to over 1000% annually. If you fail to make your loan payments, the lender has the ability to repossess the car at his discretion. This means that a towing company can legally seize your vehicle at any time, with or without notifying you. This can be extremely damaging to people that require constant transportation for their businesses. If payments are extremely difficult to make on time, some lenders will allow you to make balloon payments, in which you only pay the interest on the loan, and pay the remainder at the maturity date of the loan.
Most people are unable to pay off their loans on time, thus having the loan roll over into the next month. The lender can then charge another fee for not paying the loan or repossess the vehicle that the person has posted as collateral. Of course, these loans are very high interest rates. These rates are so high that most would believe that they violate the California usury law. However, a person or company can make themselves exempt from these laws by filing a registration statement with the state and getting a license.
A client of mine got a car title loan of $4,600 on a four-year payment plan. The annual interest rate was 86%. If you don’t believe me, send me an email and I will send you a copy of the contract (with the names of the parties removed, of course.) By the end of the repayment term, my client will have paid over $14,000, just from a small principal of less than $5,000. I can’t imagine a situation where a person would knowingly borrow money on this basis, especially if they take time to think it through. Before you decide to take out a loan at any financial establishment, be certain that you will be able to pay if off. Better yet, just don’t borrow the money. Find a friend or family member to borrow the money from. Also, spend time thinking about why that money needed to be borrowed in the first place.
