Monday, November 06, 2006

Poor Get Poorer: Auto Title Loans

There's a common misconception that poor people are poor because they're bad with money, that they can't save properly or don't invest or spend it all on drugs and alcohol. That may be true in some cases, but a lot of poor people are poor because once your credit rating gets too bad or your income drops below a certain level, you don't have as many options as rich people do, and are more vulnerable. Case in point, an auto title loan.

I happened to go with a friend to an auto title loan place and was stunned.To get an auto title loan, you give them your car's title as collateral. This place had a chart on the wall that showed the interest on various loans, and they ranged from 15 to 30 percent interest. That's not per year. That's per month. The interest on an auto title loan can increase by three hundred percent in a single year.

As outrageous as that is, it gets worse. The place I went to doesn't letyou pay back the loan in installments. It can only be paid back in full. In cash. Within thirty days. If you don't pay it back, you have only one other option - extend the loan for another thirty days by paying them a percentage, which can be as much as three hundred dollars. And that three hundred dollars doesn't count towards repayment of the loan in any way.

Let's look at this in the real world. I'm in danger of losing my apartment because I lost my job and don't have any money to pay the rent. No bank will lend me any money, because I ruined my credit rating defaulting on all my bills. All I have left is my car. So I bite the bullet and take out an auto title loan. Great, I've got a thousand dollars. But what are the odds that I'm gonna have a thousand dollars in cash a month from now? Almost nil. So the thirty days come up, they say "Pay us another three hundred dollars or we take your car." I need my car, so I pay them another three hundred, and sigh with relief. Until next month. When I owe three hundred and twenty. Within a few months, I'm trapped in a vicious cycle. The longer the loan is extended, the more I owe. The more I owe, the less capable I am of paying it back. Even if I do get a low-paying job that keeps the roof over my head, it's still not enough to get me the money I need. So I just keep paying and paying for months, watching the loan spiral out of control, until finally I just can't afford it anymore and they take my car away.

My friend was one of the lucky ones. She actually had the money to pay back her auto title loan. When my friend showed up to pay it,the clerk seemed surprised, as if she'd never seen anyone pay it back before. And I'm betting she hasn't. To get an auto title loan is probably the dumbest thinganyone can do, but there are really people out there who have no choice. The people who created it set out to target the most vulnerable of people,and set it up in a way that makes it almost impossible to pay it back.


Mauricem said...

That is so sad. Whole industries are based on fleecing the people that can't afford to fight back. People reach the end of their rope and these guys hand them a noose. You should link to your story on check cashing places BTW. That was a good one too.

peoplenotstories said...

That’s a big problem with the reporting on this issue: you never get much substance about the people that actually take out these loans. They are portrayed as this nebulous group of victims that somehow thought 300% on a loan is a good investment. That’s highly suspect. These are not the like loans most of us think of, that are paid out over a year or more. But it is not that kind of loan, and these people are not stupid or bad with money. A loan like this only makes sense if it's paid off in two months time, especially if it’s your only option in a pinch.