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How Title Lending Works [1]
['Margaret Coker', 'Mollie Simon', 'Joel Jacobs', 'Mollie Simon Is A Research Reporter At Propublica.', 'Joel Jacobs Is A Data Reporter At Propublica.']
Date: 2023-01
This article was produced for ProPublica’s Local Reporting Network in partnership with The Current. Sign up for Dispatches to get stories like this one as soon as they are published.
Consumers across the country pledge the titles to their vehicles in order to obtain quick cash through title loans. The title-lending industry, which caters to people who are often written off as credit risks by traditional lending institutions, maintains that it provides a valuable financial service. But many consumer advocates see title lending as predatory: The loans typically carry high costs and terms that make the debt difficult to pay off. If borrowers default, they can lose their car, causing even more harm.
ProPublica spent months reporting on how title lending works as part of a project with The Current, a nonprofit newsroom based in Georgia. We found that, even though Georgia banned high-interest payday loans, it carved out a loophole for title lending that puts borrowers at risk.
What Is a Title Loan?
A title loan allows people to use their vehicle’s title as collateral for a short-term loan, which typically comes with a high interest rate. In a title loan, the borrower and lender sign an agreement under which the lender places a lien on the title of the borrower’s vehicle. If the borrower does not pay back the amount of the loan, along with interest and fees, the vehicle becomes the property of the lender, who can move to repossess and sell the vehicle and even charge the borrower for the cost incurred by the lender to retrieve the car. In two states — Georgia and Alabama — the contract is referred to as a “title pawn” because title lenders operate under pawn shop statutes.
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In Georgia, this allows title lenders to charge triple-digit interest rates and exempts them from the usury laws and oversight that govern the state’s other subprime lenders. Title pawn contracts are also not set up like home mortgages, which offer customers a set schedule to pay off their loans. Critics say this practice creates a debt trap — which is profitable for companies and bad for consumers, especially those in communities of color, where a disproportionate number of Georgia’s title pawn stores are found.
How Do Title Loan Contracts Work?
What Is the Interest Rate on a Title Loan?
The maximum interest rate on a title loan varies from state to state.
Alabama allows 300% annual percentage rates, and Texas also allows triple-digit rates. In Georgia, the interest rate can be as much as 187.5% annually, far above the state’s usury caps — no more than 60%, including fees — which are imposed on other types of lenders.
At least 20 states, including Illinois and California, have capped interest rates for title loans at 36% or less per year. With interest rate caps in place, most title lenders have ceased operations in those states.
Some states also require that lenders verify the borrower’s ability to repay before issuing a loan.
It is important when making payments on a title loan to understand the terms of the contract. Some title loans are structured so that the payments only cover interest and fees, meaning that borrowers may not be paying down the loan itself. In addition to the interest rate, you may also be charged a fee for the title loan transaction.
How Long Does It Take to Pay Off a Title Loan Contract?
It takes many borrowers multiple months or even years to pay off the debt. A 2019 survey by the Consumer Financial Protection Bureau found that, of consumers who had taken out a title loan in the previous six months, 83% were still paying it off.
In Georgia, while title pawn contracts are structured to last for only 30 days, they can be renewed indefinitely.
Some states have limits on how many times a title loan can be renewed or require that the principal be paid down as a condition of renewal. But Georgia lacks such limitations.
Take the case of Robert Ball, a Savannah, Georgia, resident who got a title pawn for $9,518 in 2017. He made his monthly payments on time for two years — paying more than $25,000 — but that money only covered the interest. Meanwhile, his principal hadn’t budged.
Ball got his title pawn from TitleMax, the nation’s largest title lender, which relies on contracts being renewed as a key source of revenue.
In 2009, the then-president of TitleMax’s parent company, TMX Finance, wrote in an affidavit that, “The average thirty (30) day loan is typically renewed approximately eight (8) times, providing significant additional interest payments.”
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