Title Loan Laws

A title loan refers to a type of loan in which a person who wants to borrow money may use the title to their property as collateral. Vehicle titles are the most common collateral used for title loans. The borrower hands the original copy of the title to their car over to the lender who is then able to sell the car if the borrower does not pay the loan on time and in the amount owed.

The borrower will get the title back once the loan has been paid off in full. If the borrower is not able to pay off the loan as promised, the lender may take the borrower’s vehicle and sell it in order to recover payment for the debt. Of course, the borrower has the title to the vehicle already. Many title loan lenders require the borrower to install a Global Positioning System (GPS) or a starter interrupter device that allows the lender to disable the borrower’s car remotely. If loan payments are not made, the borrower may find that the car cannot be operated.

Some people refer to title loans as auto title loans, or pink slip loans. They are generally a type of loan that is obtained by a person who has a poor credit rating and cannot qualify for a better loan that does not require collateral and is offered at a lower interest rate.

For example, a person with a low credit score who does not own a house may need money for emergency dental work. The person owns a car worth $5,000 so he goes to a title loan lender. The person borrows $1,500 at an interest rate of 25 percent and gives the lender the title to his car. The borrower is given one month to pay off the loan and the interest.

If the borrower makes the loan payments when due and pays off the full loan amount, $1875 with interest in one month, the borrower will get the title to the car back. If, however, the borrower falls behind in paying off the loan amount, the lender can sell the car and use the proceeds to pay off the loan. The borrower loses the car.

What are the Pros and Cons of a Title Loan?

Title loans are appealing because a person can arrange the loan quickly. Further, a person may receive a title loan regardless of their credit score. Generally, the lender will not check the borrower’s credit history.

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This is an ideal situation for those who may need a sum of money quickly and have no other opportunity to obtain other kinds of loans. Title loans are a quick way to cover an emergency financial problem, such as an unexpected large expense.

However, there is more to say against title loans than there is in favor of them, including:

  • Interest Rates: The interest rates associated with title loans are relatively high and the interest owed accumulates quickly. Typical title loans have an annual percentage rate (APR) of three hundred percent. This means that a title loan costs the borrower at least three times the amount they originally borrowed, just for fees and interest.
    • A standard title loan lasts one month and has an interest rate of twenty-five percent per month. Many people cannot afford to pay the loan and interest back within one month, so they roll the loan over each month, and find themselves owing the three hundred percent of the amount borrowed at the end of a year.
    • Some lenders structure the loans so that timely payments over many months do not reduce the principal owed at all; the payments are credited to interest only, and the interest rate sometimes exceeds 200 percent.
    • A balloon payment equal to or in excess of the amount borrowed can then be due at the end of the loan, causing many consumers to default and have their vehicles repossessed, and the loans come with costs other than interest;
  • Illegal in Several States: Title loans are illegal in several states (as many as thirty, according to some sources) because of their short terms, lump sum repayments, and the excessively high APR.
    • Many states see title loan lenders as predatory and do not allow them. For example, a true title loan is illegal in Michigan. The states that do allow for title loans do not regulate them carefully. Title loans are often viewed as a consumer safety issue;
  • Misleading Name: Sometimes, a borrower thinks they are taking out a title loan, but are actually becoming involved with loans that are even less regulated than title loans.
    • These loans are often called consumer installment loans, or consumer finance loans. They are alarming due to the fact that they might be structured to last much longer than a typical title loan. They might also have a higher rate of interest. They are even more disadvantageous for borrowers than title loans.

As previously mentioned, when a borrower takes out a title loan, the lender is given the title to the borrower’s vehicle. This gives the lender the right to take and sell the borrower’s car if the borrower does not repay the loan. One in five borrowers loses their vehicle to these lenders. The borrower risks losing their car and still owing much more than the amount of the original loan to the lender. This is clearly a substantial risk when looking at the benefits vs. the risks of a title loan.

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Do I Need Insurance to Get a Title Loan?

Most states today require automobile owners to prove that they have insurance in order to register their automobiles with the state. A person who is considering an auto title loan should have auto insurance. If the borrower’s car is damaged or destroyed in a collision, it is not available to sell to pay off the title loan. If the borrower is insured, then the payoff from the insurance company can be used to pay off the title loan.

If the borrower does not have insurance and their car is destroyed, then they still owe the lender the balance of the loan plus interest. The borrower would have to find another way to pay off the loan that would not involve selling the car.

Some title loan lenders offer a kind of insurance product that results in cancellation of the title loan if the car is destroyed in an accident. It does not produce any payment for the borrower to help the borrower replace their car. It only achieves cancellation of the loan balance. However, if a person is intent on getting a title loan, it might be a good idea to purchase this product if the lender offers it. It is also a good idea to have automobile insurance as required by state law in the state where a person lives. Usually, however, title loan lenders do not require it.

Are Title Loans Legal?

As stated above, title loans are illegal in many states. They are illegal because of their predatory nature. Title loan lenders target low income individuals and consumers with poor credit ratings. They lead borrowers into an endless cycle of excessive debt from which they may not be able to escape. Also, the advertisements for title loans are often misleading and do not fully inform the borrower of the features of the loans.

There is a variety of types of title loan fraud. For example, sometimes the lender does not inform the borrower of all the terms and conditions of the loan before the loan is made. So the borrower does not understand what the full costs of the loan might be. Lenders sometimes use “virtual office addresses”, which are post office box addresses and other mail delivery services. They do this to keep their physical location unknown, so a borrower cannot find them in the event of a dispute.

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Title loans are legal in Alabama, Arizona, Delaware, Georgia, Idaho, Illinois, Texas, Mississippi, Missouri, Nevada, New Mexico, South Dakota, Tennessee, Utan, Virginia, and Wisconsin. In some states, they are illegal. For example, title loans in which the lender takes physical possession of the original title of the borrower’s car when the loan is made are illegal in Michigan.

Other states allow title loans because of title loan loopholes in their laws.

For example, in California, the interest rate on title loans is limited, or capped, for loans up to $2,500, so lenders typically require a borrower to borrow a minimum of $2,500. Then the lender cais able to charge a higher rate of interest. In South Carolina, the same loophole allows lenders to set a minimum loan amount of $600; this allows the lenders to avoid laws that cap the interest for lower amount loans.

Several organizations, including the Consumer Federation of America, note that these loans are considered predatory, making them highly detrimental to the financial welfare and security of borrowers.

They decry the fact that state and federal governments do not enact legislation that protects low-income individuals from predatory lending practices such as title loans.

Do I Need an Attorney for a Title Loan Dispute?

Generally, title loan lawsuits involve a claim for breach of contract or fraud. An example could be a borrower contesting the lender’s right to repossess their vehicle. Some situations might allow for renegotiating the terms of the contract for loan modification. Other legal disputes could include loan fraud, identity theft, and violations of consumer protection regulations.

Class action lawsuits are a common solution to such disputes. A knowledgeable and qualified foreclosure lawyer may be helpful in title loan disputes. An attorney can educate you about your state’s laws, your rights and options, and will represent you in court if necessary.

Another option would be a consumer protection lawyer. An experienced consumer protection lawyer will be knowledgeable about consumer protection laws and the types of claims that a borrower might make against a title loan lender.

An automobile title loan can leave you in a worse financial position than you were in before you got the loan. If you are having trouble with a title loan lender, you should contact an experienced real estate or consumer protection lawyer to help you find a solution.