These loans are typically short-term and tend to carry higher interest rates than other sources of credit.
Lenders typically do not check the credit history of borrowers for these loans and only consider the value and condition of the vehicle that is being used to secure it.
Despite the secured nature of the loan, lenders argue that the comparatively high rates of interest that they charge are necessary.
As evidence for this, they point to the increased risk of default on a type of loan that is used almost exclusively by borrowers who are already experiencing financial difficulties.
Title loans first emerged in the early 1990s and opened a new market to individuals with poor credit and have grown increasingly popular, according to studies by the Center for Responsible Lending and Consumer Federation of America.
Government regulation often limits the total number of times that a borrower can roll the loan over, so that they do not remain perpetually in debt.
Typically, lenders choose this option as a last resort because it may take months to recover the vehicle, and repossession, auction, and court costs all decrease the amount of money they are able to recoup.
Most states require the title loan lender to hold the vehicle for 30 days to allow the borrower to recover it by paying the balance.
[7] This leaves lenders a cushion to make profit if ever they need to repossess the vehicle and sell it at auction, in the event the borrower defaults.
[9] Other states, like Montana, have begun placing strict regulations on title loans by not allowing the APR to reach above 36%, down from the previous 400%.
Some states have no limit on the APR that title loan companies can charge, while others continue to crack down and push for stricter regulation.
The vote did not pass, but voters and politicians in Illinois and other states continue in their convictions to regulate or outlaw title loans.
According to the study, SDC consumers are generally less educated, have more children, and are based in the South, where there is a greater concentration of unbanked or underbanked people.
[16] Critics of title loans contend that the business model seeks and traps impoverished individuals with ridiculous interest rates by lenders who aren’t entirely transparent regarding the payments.
However, lenders are getting around the restrictions by exploiting loopholes allowing them to lend for the same purposes, with high-interest rates, disguised as loan brokers or as a Credit Services Organization (CSO).