Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Feb 8, 2021

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For most Americans, the last few years have been anything but easy. The Great Recession, as many call it, has caused countless Americans to become unemployed or underemployed. Millions of Americans have had their homes foreclosed, lost the opportunity to pursue an education, and even faced hunger. In these desperate times, a growing number of Americans need to borrow money.

Borrowing money can be difficult for some Americans though. Those with poor credit often stand no chance of qualifying for even the steepest of bank-sponsored loans. As a result, these borrowers with bad credit scores are forced to turn to payday and car title loan lenders.

While payday loans provide small cash-advances to borrowers, car title loans provide larger sums of money to those willing to put their vehicle up as collateral. Hoping to use their vehicles as collateral for high-interest short-term loans, more and more Americans are turning to these title loans.

But despite their benefit to borrowers who have few other borrowing options, car title lenders have been facing increasing resistance across the country. Consumer advocates and former auto title borrowers are retaliating against what they believe are usurious interest rates and, in some cases, even criminal activity.

The Virginia Battleground

The opposition to these no-credit title loans is perhaps most pronounced in the state of Virginia.

Until October of 2010 car title lenders were completely unregulated in Virginia, but a new law introduced that month limited the amount of interest that title lenders could charge and lend. The law also regulated how long of a term these loans could carry.

However, the damage had already been done.

The proliferation of car title lender start-ups in Virginia prior to the 2010 law helped lead to the origination of more than $125 million in car title loans in 2011. Out of the 105,542 car title loans issued to Virginians in 2011, a whopping 13,771 missed payment for at least 60 days.

“Anybody that’s behind 60 days—and it’s only a one year loan anyway—is obviously just going to default,” said Jay Speer, executive director of the Virginia Poverty Law Center, according to a CBS interview. “It just shows what a totally unaffordable loan it is, and just because people are signing up for them doesn’t mean they have possibility of really repaying them.”

Once borrowers are unable to repay, lenders utilize a tool that is often devastating for defaulting borrowers.

As seen in other schools of lending, these lenders have options for covering their losses. For car title loans, when borrowers fall behind, lenders can repossess collateralized vehicles.

8,378 vehicles were repossessed in Virginia in 2011, with 60 percent of those being liquidated by lenders to make back their lost money.

According to Speer, the repossession of vehicles “creates a downward spiral” that takes what is usually a borrower’s only vehicle away.

“This is not an option that is good for anybody. This is absolutely a horrible idea,” said Speer.

Regardless of Speer’s opinion it is clear that this type of financing is oftentimes the only form of financing available to many desperate borrowers.

The Law Bites Back

Despite offering loans to the desperate, some unscrupulous car title lenders have been found skirting the law. Fortunately, auto title lenders aren’t outside the reach of the law.

A lender based in Virginia offered car title loans to borrowers in West Virginia. Since these are illegal in West Virginia the loan company was ordered by a judge to halt the collection of payments, repossessions, and the lending of new loans following a lawsuit tried by the State’s Attorney General’s Office.

A similar fate found Brar Inc., another Virginia-based auto title lender. After being caught making illegal loans, Brar Inc. paid $10,000 as part of a settlement with Virginia’s Attorney General Ken Cuccinelli.

It was largely because of these criminal activities that Virginia pursued legislation to regulate this industry.

And Virginia isn’t alone in this legal fight against car title lenders.

Last year Texas tried to regulate car title loan lenders, but they failed thanks to $3.9 million in lobbying from the lending industry.

Feeding Demand

If legislation can’t curb the spread and influence of car title loans lenders then perhaps an end to the ongoing recession can.

Title lenders feel that the huge number of loans in Virginia is symptomatic of the demand for bad credit loans. For many prospective borrowers, car title loans are sometimes their only source of credit.

“There continues to be a need for these types of loans for certain folks,” said Scott Johnson, representative of Community Loans of America in a Business Week interview. “A lot of our customers are in the trades industry: landscapers, plumbers-folks that need access to capital in order to be able to do their job but don’t have the credit ability to obtain a loan from a bank or other sources.”

Last Resort

For most Americans, their vehicles are tools for commuting to work, school and interviews. Since the housing market collapse many Americans have been forced to rent homes or apartments. This often results in their sole remaining valuable asset being their vehicle.

But desperate times call for desperate measures, and some borrowers are finding themselves in financial situations so severe that they’d be willing to jeopardize their most valuable asset.

Like all forms of lending, car title loans are not default-proof, but nor do are they the predatory products that industry opponents make them out to be. Most car title loans are repaid in full just in the same way that most other secured loans are repaid, and borrowers keep possession of their cars.

Borrowers who know how to budget their money can and do pay back their auto title loans. But unfortunately, like all types of financing, there are always some who cannot repay their loans and lose their vehicles. While the amount of defaults has undoubtedly increased given the increase in demand for these loans that doesn’t mean the product is inherently bad.