Alabama car title loans violate state lending laws

A judge has ruled that car title lenders in Alabama are violating state lending laws, which have a restrictive cap of 24% per year in interest. Auto title loans can cost ten times that much and more, which is hardly beneficial to the consumer.

More below.

Auto title loans can cost you 300% per year and your car

Consumers in Alabama may have received a break last month when a circuit court judge ruled that the practices of car title lenders within the state violate the state’s 24% interest cap established by the state’s Small Loan Act. According to the judge, the business practices of auto title lenders violate the equal protection clause of the Constitution.

Car title loans are small loans, usually of less than $1000, that use the title to the borrower’s vehicle as collateral for the loan. The loans are usually offered in amounts that are far less than the value of the vehicle; a car worth $4000 might get you a $1000 loan. The interest rates vary, but rates of 25% to 30% per month are not unusual. This translates to 300% or more per year, an astronomical rate for a secured loan. The rates offered for payday loans, which are unsecured, are not much higher, averaging about 390% nationally. The main difference between the two is that the auto title loan is secured by the vehicle. If the borrower fails to make a monthly payment, he or she may find their car towed the next day. Then the trouble starts.

Once the car has been towed, the owner may have to pay the following to get their vehicle back from the lender:

• The loan principal
• The towing charge
• Storage fees at the impound lot
• Interest owed on the loan principal

The original loan may have been for $500, but it isn’t unusual for the fees and interest for such a loan to amount to $2000 or more. These must all be repaid before the borrower can retrieve the vehicle. Of course, many people will have trouble repaying the loans if they cannot get to work because they have no transportation.

What happens if the borrower cannot repay? This is a common scenario and the answer is a simple one - the lender is permitted by law to sell the car. Once the car is sold, the lender may deduct the amount that they are owed, and in most states, they must then return any leftover money to the borrower. That is not the case in all states, however Georgia and Alabama permit the lender to sell the car and keep all of the money.

The prevalence of such lending institutions points out the need for the availability of small loans to consumers who have few other places to borrow money. Borrowing against a credit card may be expensive at 20% or so per year, but that cost is a mere fraction of the amount it costs to borrow against a car title. It seems obvious that if consumers could use alternative lending methods, such as credit cards or bank loans, they would. The fact that they resort to risking their car over a high interest loan of a few hundred dollars suggests that there is something seriously wrong with our financial system.