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Auto Title Loans, Not So Bad After All--Who Knew?

posted by Nathalie Martin

In a recent article, Money to Go:  Auto Title Lending has an Important Role in the Financial Services Marketplace, Professor Todd Zywicki concludes that outlawing title loans would be bad for consumers, and that title loans are cheaper and better for consumers than their likely alternatives.

Many statements in the article seem questionable, including that:

  • competition in the title loan business is “fierce” which keeps the interest rates low
  • title loan interest rates are strictly regulated by all but four states, 
  • title loan pricing is transparent and easy to understand, making it easy for customers to shop around for price,
  • a large percentage of title loan customers use them to keep small businesses afloat, and
  • 70% of borrowers have more than one car anyway, and most of the rest have access to public transportation.

Having just finished curb-side interviews of over 100 customers at payday lenders, I have some experience from the horse’s mouth with payday lending.  And, while my study was not of title loans, people mentioned title loans in their closing (unsolicited) remarks. I also have seen dozens of title loans through our clinical law program. I will address just a couple of these points.

Will customers be hurt if these go bye-bye?

My own interviews suggest that once a person has a high interest loan, especially an interest-only loan like a title loan, it becomes harder and harder to make ends meet. In other words, these make it worse not better, especially since most customers do not take out the loans to deal with emergencies, but to pay regular, recurring bills. 

I also question some of the harms Zywicki identifies if these loans disappear. He says that if a customer could not get a title loans, she would need to sell her car or use payday loans. I have a hard time believing anyone would have to sell her car rather than taking out a title loan, at least if they could go get an endlessly-available payday loan instead. Plus many people do have family or friends, even if they’ll only lend (as Zywicki says) in an emergency. Zywicki also claims that where high cost credit is eliminated completely, loan sharking returns, but is this true? Has this happened in Massachusetts and other places where they have really eliminated payday and title loans? There is a study I’d like to see.

So which is better for customers, title loans or payday loans? 

It depends if you are sure you can pay the loan back. Interest rates are lower for title loans. Rates for title loans in New Mexico range from 213-300%. This is roughly half the annual percentage rate of a payday loans (or their new replacement, the installment loan), which in our market runs from 417-560%, but none of these rates are what I’d call “fiercely” competitive.

So…if a customer is sure she can pay the money back (and who is really???) and not borrow more, the title loan would be better in my view.You can only get one title loan, whereas it is very common for people to have several (four to seven) payday loans totaling more than their entire paychecks. In fact one woman in my recent study of bankruptcy debtors had over 30 payday loans. So yes, it’s better to get a title loan than a payday loan if you are only getting one loan and you are sure you can pay it back in a cycle or two. Good luck finding that title or payday loan customer.   

What about the disadvantages of title loans? To me, for the average borrower, the disadvantages far outweigh the advantages of title loans. Title lenders can and do take your car. Plus, there are hidden fees and charges. As one woman is my survey reported “title loans are worse [than payday loans]. They make you take their mandatory local AAA service, and if you are even one day late, they take you car. They took mine and I lost my job. ”   

Title lending is not even that profitable, says Zywicki, because of the cost of storefronts. I know storefronts are expensive but I’ve wondered for a long time, why aren’t internet title loans cheaper than storefront ones?  I can’t figure out why market forces haven’t dropped those rates.

And what about transparency? Zywicki doesn’t mention that title loans are interest-only loans, and from what I have seen on the ground, most are designed to be just big enough so the person can never pay it off, but instead must just keep paying the monthly fee. 

People do not seem to understand the loans and think when they make a payment, they reduce the loan.  Silly them. If I had a buck for every person who told me they did not know their title loan or payday loan was interest-only when they signed up, I’d be as rich as a title lender.  


Even if we think that absence of high cost credit means there will be loan sharking, there's still a question of how much loan sharking. I don't think we can assume a dollar-for-dollar substitution. If there's currently $100M in high-cost credit and that were to be banned, I don't think we end up with a $100M loan-sharking industry. Angie's work suggests that some borrowers would simply not borrow and others would turn to family and friends.

It's a pretty big omission to neglect to mention that these are IO loans. Very few standard consumer loans are IO; IO products require a lot of financial discipline that most consumers don't have. If the lender is looking to get repaid and make its profit on the interest, rather than repossess or make money in a fee sweatbox, IO is a very poor choice of loan structure.

I'm not sure what you mean by interest-only. My understanding is that after a month you have to pay off the principle and interest of the loan all at one time. I guess if you get a new loan at the end of the month, you end up just paying the interest. Is that what you mean? I might not understand how the transaction works or what the term interest only means.

Thanks for the comment Jim. Interesting point. I guess you could see the loan in one of two ways, either as a 30-day loan with a one-time fee, or as a loan you can keep out for as long as you need to, as long as you repay the fee. The first would not be IO and the second would be IO.

What interests me is how the loans are actually used by most consumers, and how clerks explain to customers how to make payments. It is my belief that clerks talk most about repaying the fee, not repaying the loan, that if you do pay part or all of the principal, they call you right back and offer more money, and that for most customers, these are IO loans. I also wonder if it would help to tell customers that if they come in to just pay the fee, the amount of the loan will not be reduced. People just don't seem to know that going in.

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