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The Truth About Title Loans and Repossession

posted by Nathalie Martin

Susan Price filed for bankruptcy in 2005, when she became disabled. She now receives $980 a month in disability payments and her rent is $550. Not so bad unless you consider her last move to make ends meet. She borrowed $4,000 to make it through the holidays and pay off some bills, using her $10,000 Jeep as collateral. The jeep was the last vestige of her formerly middle class life. Under her eighteen-month loan, she pays $581.47 a month, and will pay over $10,466.46 to pay off the $4,000 loan.  At least Susan’s loan includes some principal. Another client, Sean, paid $11,516 total, on a $1,500 interest-only title loan. He paid over $10,000 in interest on the loan, which was renewed forty times before the borrower buried his pride and asked his parents to pay off the $1,500 in principal.

Ms. Price’s loan demonstrates one unique feature of the title loan. It is completely asset-based. With few exceptions, title lenders have no interest in whether a consumer can afford to pay back the loan, or even make the monthly interest payments. Ability to repay is simply not part of the underwriting process. Nor need it be in order for lenders to collect their debt, and then some. Since lenders lend at 40% of value or less, they can always rely on the car if the borrower stops making the monthly payments. This also may explain why some title lenders also sell used cars. As one new Title Lender’s sign reads, “Buy here, pay here.” Only in this particular context would a lender make a loan like this to someone who makes just $980 a month. By structuring a loan with $580 monthly payments, from a person who makes less than $1,000 a month, a lender can virtually assure that it will end up with the payments for some period, and then, the car. 

Soon my co-author Ozymandias Adams and I will be publishing a paper in which we analyze state-collected data from New Mexico for the period of 2004 to 2009, which show some alarming things.For starters? The rate of repossession per loan is nearly 13%. Moreover, the number of loans per customer averages between 3.15 and 5 loans per customer. This means that if you consider the number of loans per customer, well over a third of all customers have their cars repossessed. That rate of repossession is astounding to say the very least. Moreover, for this demographic, this likely means the loss of their most valuable asset. Stay tuned for even more facts about this, in our upcoming piece, Grand Theft Auto Loans:  Repossession and Demographic Realities in Title Lending.


This may sound mean, but it is a sincere question. Does Ms. Price need a conservator as she cannot run her own affairs?

Even a very simple amount of math with her rent being over $500, her car payment being over $500, and her income being less than $1000 shows she cannot afford the loan. It would be nice if she had some money left over to buy food.

It sounds like she was guilted by so called friends and relatives to overspend for the holidays and fell into a money hole.

So I suppose the solution is for these "thieves" known as lenders to refuse to loan to these people? They are supposed to tell the borrower, "you really don't need this money, sorry. And by the way, you are also irresponsible, try cutting your spending"?

Give me a break, you can't protect a person from themselves. Some people make terrible choices and that's banning loans to these people won't make a difference. Get off of your high horse.

Here is what I don't understand:

If the person needs $4,000 and has a $10,000 asset, why would she pawn the asset for $4,000 when she is sure to lose it, rather than get, say $8,000 for the assett?

The answer, of course, is that the woman is not intelligent and the lender is taking advantage of her.

I think you do need to protect some people from themselves.

The risk of lending to a typical payday customer is quite high. Most of the people in that demographic are in perpetual financial emergencies. They need cash quickly and often times still need use of their cars, so selling the car isn't really an option.

Of course, if lending institutions did not lend to these people, they would be accused of being racist or redlining or other forms of discrimination, yet when they do lend and price the loans appropriately for the relative risk, they are accused of being predatory.

If the do gooders don't like pay day lending, they are free to open their own lending institutions and offer loans that they feel are more "fair". My guess is after a few months of massive losses, their attitudes would change.

As far as PayDay lenders...I know it's not necessarily the subject here but it was brought up in the comments:

If you can purchase Beer, Liquor or both at the same place you get a loan the terms are going to be predatory! Its funny that you rarely see those establishments in the more affluent areas the city.. Circumstantial? You will have to crunch numbers to see that one. I don't need it but the "personal responsibility" crowd may.

Plain and simple for the blame the Personal Responsibility crowd: A fixed income be it retirement, TRS, Social Security or a combo IS NOT ENOUGH ANYMORE! Health care is a huge bite. transportation... Insurance... FOOD! There was no way to plan for that back when!! Who knew that the price of health care would double???!! Enter a few thousand "I & Js" and you'll get the picture. Look into their eyes hear the stories from them before passing judgment. Most likely when that woman was entering the workforce the only credit card around was Diners Club.

Patches, you won't see Payday lending in affluent areas because people who live in affluent areas are not Payday customers. It isn't a conspiracy.

I'm not passing judgment on anyone. However, there is no point in sugar coating the issue.

Regular banks will not lend money to these folks because of the risk associated, so Payday lenders fill the void and charge appropriately for the risk. It is also obvious that many of the customers are in perpetual financial emergencies which is why the balances keep rolling over and the loans never get paid off. I saw this with subprime mortgage lending. You make a subprime loan and get the monkey off their back, one year later, they are back trying to refinance again because of yet another emergency.

I'm really interested to see the paper! Is the New Mexico data publicly available?

"This means that if you consider the number of loans per customer, well over a third of all customers have their cars repossessed. That rate of repossession is astounding to say the very least."

You sound like Moody's during the mortgage hey-day. "There's no correlation between loans. There couldn't be!" I'm guessing, BTW, that the repossessions aren't randomly spread through the loans.

I'd be really curious to ask the lenders repoing 30% of their loans how that affects their profitability. People tell me it costs around $500 to repo and sell a title-loan car. Unless the cars are worth a lot of money, it seems tough for a lender to make that much back. For instance, if we assume lenders give 50% of the value of the car in the loan, it would mean only loans over $1001 would make even a dollar.

"I'm guessing, BTW, that the repossessions aren't randomly spread through the loans."

Probably not, but it can't be all that disproportionate, and it might even go the other way. After a given borrower's car gets repossessed, he's got to buy a new one (and pay it off, if he didn't pay cash) before the cycle can repeat.

re Jim Hawkins: First of all, the original post cites 13% per loan, not 30%, which the author guesses might correspond to ~30% per borrower. But the example doesn't work in any case. If they'll lend up to 50% of the value of the car, then a $1000 loan is against a $2000 car. When the borrower defaults, using your numbers, they're out $500 to sell the car, plus $1000 to the borrower, so they're ahead by $500.

ltk, good points. I need to be more careful before posting.

I guess using those numbers a $501 loan would be profitable. 1002 car sale value - 501 for the loan - 500 for repo and resale = 1.

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