What you should know about title loan buyouts
By Allie Johnson
August 14, 2014
Trapped in a car title loan? It can be hard to get out once you've signed on the dotted line, but consumer advocates say turning to another title loan company for help will drive you even further in debt.
Some title lenders take advantage of consumers and their inability to pay, consumer advocates say. In some states that have title lending, such as Missouri, Georgia and Texas, ads from car title lenders urge consumers stuck in a title loan to transfer the loan to a different title loan company. These loans are often advertised as “title loan rescue” or “title loan buyouts,” but consumer advocates say they're just another title loan in disguise.
“You are just replacing one bad deal with another,” says Linda Sherry, director of national priorities for Consumer Action.
But title lenders offer credit-challenged consumers loan options they otherwise wouldn't have, says Scott Allen, a title lender and president of the Arizona Title Loan Association.
“I always ask people who criticize [title lenders], 'Should people have access to credit or not?'” Allen says. “Because if they could borrow the money cheaper someplace else, I'm sure they'd be going there.”
What are car title loans?
Consumer advocates say taking out a title loan can be an expensive mistake. In a car title loan, a consumer in need of quick cash puts her paid-off vehicle up as collateral on a loan worth less than the vehicle.
[Related article: What's so bad about car title loans?]
Car title loans exist in 21 states, mostly places where lenders have gotten exemptions from state laws that cap interest rates, according to a report by the Center for Responsible Lending (CRL) and the Consumer Federation of America (CFA).
Title loans typically are set up to be repaid in “balloon payments,” which means the entire loan amount, plus interest, is due at one time, usually about 30 days after taking out the loan, experts say. Title loan companies typically allow consumers who can't pay off the loan to roll it over, month to month, paying only the interest each month. That means the consumer can pay thousands in interest and still owe the total original loan amount.
For example, according to the report, a typical interest charge is $25 per $100 borrowed, or $261 to borrow the average loan amount, $1,042, for one month. A consumer who renews the loan a typical eight times would pay over $2,000 in interest without having put a dent in the principal.
But it's becoming more common for title lenders to offer fully amortized loans, in which the borrower repays the loan with a series of equal payments, Allen says. For example, Allen's company, Cash Time Loan Centers, used to offer only loans with balloon payments. Now they offer both types, and about 85 percent of the loans they make are fully amortized, Allen says. “We offer the consumer a choice and that's what they choose,” he says.
''Stuck in a title loan? Help is available.
What if you've already signed over your title and worry you'll never get it back? Don't fall for any ad or offer that promises to get you out of a title loan, experts say.
Title lenders in some states put up billboards and other ads targeting consumers who are stuck in a title loan. In one Georgia lender's ad, a woman rides in a convertible with her arms in the air. “Need to get out of a title pawn?” the ad reads. “We can save you thousands.” One Texas lender's website states, “We can pay your current title loan off now!”
In some cases, these lenders offer monthly installment payments, rather than a balloon payment, but still require consumers to put up their cars as collateral. With installment loans, the borrower makes equal payments of interest and principal over a set period of time. The interest typically is very high, according to the report by the CRL and CFA, so the borrower often ends up paying double the original loan amount, or more, in total interest. Installment title loans are “increasingly common,” according to the report. For example, in Illinois, installment borrowers paid an average of 212 percent APR for a loan of a little over a year.
One Texas title lender that does give specifics on its site advertises that a $4,000 installment loan paid off in one year would carry only $240 in interest. However, online consumer complaints state that the company requires borrowers to join an “auto club” that offers free towing and costs over $100 a month.
“I can't make a blanket statement and say never do it,” Rosemary Shahan, president of Consumers for Auto Reliability and Safety (CARS), says of these title loan buyouts. “But I would be very suspicious.”
However, there are other options to explore, says David Jones, immediate past president of the American Association of Independent Consumer Credit Counseling Agencies. Here are two steps to take:
1. Meet with a credit counselor from a nonprofit credit counseling agency, who can:
- Review your specific situation, including your income, your assets, how much you owe and your household budget, Jones says.
- Look at the reason you turned to a title loan. Some consumers take out title loans to pay other bills: They might be getting collections calls from a hospital or credit card company, Jones says. In those cases, it might be possible to work out an arrangement with the initial lender “There might be some negotiation room there,” Jones says, and that might let the consumer pull together enough money to pay off the title loan. But it's typically not possible to negotiate with the title lender, Jones says.
- Help you come up with other solutions. Depending on your situation, a credit counselor might recommend cutting back on expenses or even turning to resources such as a community food bank, your church or family members so you can pay off the loan and keep your car, Jones says.
2. Consult a consumer attorney with experience in fair debt collection practices, Shahan says. You can find an attorney through the National Association of Consumer Advocates, she says. A lawyer might offer a free consultation, review your title loan contract and look for a way you might be able to keep your car. Consumer attorneys have helped consumers get out of title loans and have filed lawsuits against lenders, Shahan says.
But most experts agree, the best way to get out of a title loan is to never get into one.
“We tell consumers to never, ever put up your car as collateral,” Shahan says. “You'd almost always be better off selling it yourself and buying a less expensive car.”