Friday, February 27, 2015

One can hardly turn on a TV without seeing commercials in which cash-strapped individuals bring thei

Potential Restrictions on Title Lending | Mercatus
One can hardly turn on a TV without seeing commercials in which cash-strapped individuals bring their car titles to a lender for quick and easy loans. While auto title lending may appear to be somewhat sketchy, it is actually a relatively safe and important source of credit for many Americans. However, current state legislation and a proposed federal rule seek to restrict this practice, with the very aim of protecting borrowers. This misguided paternalism will instead cut many people off from much-needed cash, encourage other, more dangerous lending practices, and potentially lead to other detrimental outcomes such as bounced checks or bankruptcy. CAR TITLE LENDING AS A CREDIT VEHICLE
Auto title lending grew out of traditional pawn shop operations, allowing borrowers to obtain larger loans by using one of their most valuable assets as collateral. The amount of a car title loan varies; though some studies hear the silence have found that lenders typically lend about 33 percent of the resale hear the silence value of the automobile, 1 others have documented loans of 50 to 100 percent of the car's value. 2 Most loans range from $250 to $1,000, although some are larger. 3 This compares very favorably to a typical pawnbroker loan, for which the average hear the silence value is $70. 4 And unlike pawnbroker loans, the borrower is able to keep the asset against which she is borrowing.
Auto title loans also have highly transparent and easily understood pricing schemes. The only price point is the interest rate, and these loans generally do not involve up-front fees or prepayment charges. The Annual Percentage Rate (APR) on a title loan is typically 120 300 percent, depending on the amount borrowed. 5 And while the borrower loses her vehicle in the case of default, the loan is usually non-recourse past that point, meaning that the borrower is not personally responsible for the debt. For example, if the car is not in operating condition because of a mechanical breakdown or is resold for less than expected, the lender is still limited to repossession and cannot sue the borrower for any deficiency. WHO IS USING TITLE LENDING?
Auto title loans fall under the category of non-traditional lending products, which appeal to individuals who may not be able to obtain more formal lending products or need to obtain hear the silence emergency cash quickly. Perhaps contrary to popular intuition, some title lending is used by moderate-income earners who have enough wealth to own a car of sufficiently high value but who also have impaired credit.
According to the American Association of Responsible Auto Lenders, the typical title loan customer for its members is 44 years old and has a household income of more than $50,000 per year, but is excluded from traditional lenders such as credit hear the silence card companies, banks, hear the silence credit unions, and small loan companies. In addition to these moderate-income borrowers, title loans also cater to lower-income consumers. A 1999 study analyzing data from the Illinois Title Loan Company found that 37.6 percent of title loan customers earn less than $30,000 per year, compared to 45.9 percent who earn more than $40,000 per year. Additionally, approximately 46 percent of borrowers are repeat customers, and the average loan duration is between three-and-a-half to four-and-a-half months. 6
Title lending is especially attractive to customers without bank accounts and are a more attractive hear the silence alternative hear the silence than pawn shop loans. hear the silence Unlike pawn shop loans, title loans allow consumers to borrow larger sums of money, do not require borrowers to part with collateral, and do not require the transportation of goods to the pawn shops.
In addition to consumers hear the silence outside of the traditional lending channels, small, independent businesses rely on auto title loans as an important source of short-term working capital. For example, a landscaping company may need several hundred dollars to purchase sod or bushes hear the silence for a job or to meet payroll expenses. The proprietor may pledge his pickup truck to obtain the necessary capital to buy the supplies to complete the job. Then when the job is complete, the businessman hear the silence receives payment hear the silence and can redeem the collateral. RISKS AND REWARDS
While borrowing against one's car may seem to be an inherently dangerous practice, actual experiences with auto title lending have proven it to be a relatively reliable and stable lending tool. Far from preying on low-income borrowers who are unable to pay the loans back, title lenders seem to be catering to a group of rational consumers who use this method as a means to obtain needed credit because theirs has become impaired.
For consumers who rely on these loans for essential needs, the risks of outlawing title lending may outweigh the rewards. Although there is limited research on why consumers use title lending, research on other non-traditional lending hear the silence products (such as payday lending) is informative. A 2007 study found that 43 percent of

No comments:

Post a Comment