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Title Loans the New Subprime Mortgage Crisis?

Michael Rapp Feb. 13, 2015

It seems the sub-prime lending crisis has been reborn — this time in form of automobile title loans, which are crippling many of the consumers who unsuccessfully try to better their financial situation. According to a recent review by the New York Times, “borrowers turn over the title of their cars in exchange for cash — typically a percentage of the cars’ estimated resale values”.

Very often, title loans bring exorbitant interest rates, sometimes as high as 170%. In effect, title loan borrowers end up digging themselves a deeper financial hole, struggling to keep up with loan payments to the point where the car is actually repossessed.

For many, title loans offer a chance to remedy their financial troubles for those who would otherwise have no other option. Experts believe the rise in title loans has become today’s equivalent to the sub prime mortgage crisis. By trading the rights to their vehicle for the promise of quick cash, lenders are profiting substantially from the financially weak and desperate.

As the New York Times article reports, title loan lenders calculate the amount of the loan based on an automobile’s resale value rather than the ability of the borrower to repay the loan, consumers often take on more than they can handle. One in six title loan borrowers end up having their car repossessed, according to the Center for Responsible Lending.

The threat of repossession creates a vicious cycle for borrowers, especially for those who depend on their vehicle. Borrowers continue to pay off the loan in fear of losing their car.

While lawmakers and consumer advocates are calling for stricter rules regarding title loans, much of the damage has already been done. For the financially poor, the debt caused by title loans causes a great deal of hardship unforeseen at the point when the loan is issued. In particular, lawmakers are striving to prevent lenders from collecting debt after vehicles have been repossessed.