Short-term lenders, seeking a detour around newly toughened restrictions on payday and other small loans, are pushing Americans to borrow more money than they often need by using their debt-free autos as collateral.
Their hefty principal and high interest rates are creating another avenue that traps unwary consumers in a cycle of debt. For about 1 out of 9 borrowers, the loan ends with their vehicles being repossessed…
But Jordan said it wouldn’t make a loan that small. Instead, it would lend her $2,600 at what she later would learn was the equivalent of 153% annual interest — as long as she put up her 2005 Buick Rendezvous sport utility vehicle as collateral.
State law limits payday loans to $300, minus a maximum fee of $45. California also caps interest rates on consumer loans of less than $2,500 on a sliding scale that averages about 30%. Consumer loans above $2,500 have no interest rate limit.
For that reason, essentially all auto title loans in the state are above that level, according to the state’s business oversight department.
– From the excellent LA Times article: More Auto Title Lenders are Snagging Unwary Borrowers in Cycle of Debt
Last week, I published an article highlighting how the use of “alternative financial services” has continued to increase despite the so-called economic “recovery.” These services include payday loans, refund-anticipation loans, pawnshops, rent-to-own services, and the little known, but recently surging, category called auto title loans. Here’s an excerpt from that post, titled Use of Alternative Financial Services, Such as Payday Loans, Continues to Increase Despite the “Recovery”:
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