Why Banning Auto Title Loans Is Foolish
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UPDATED: Nov 5, 2012
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Across the country payday loans have been demonized into some kind of ball and chain that sucks money from borrowers like a vacuum on steroids. Sure, some borrowers do have trouble paying back payday loans and end up in the news recounting their cautionary tale, but at the end of the day these types of loans aren’t a criminal operation. Americans still manage to borrow and repay payday loans, and the industry continues to grow due to the colossal demand for these products.
Despite this, or perhaps in spite of it, many states, counties, and cities have thought it would be a bright idea to just ban payday loans along with other short-term loans like auto title loans. Unfortunately, banning car title loans is a horrible idea, as is lumping them into the same category as payday loans, particularly given the financial climate that continues to fill the country’s air.
To refresh everyone’s memory, an auto title loan is financing that is secured by a vehicle. In this situation, the vehicle acts as collateral. Auto title loan providers require collateral, such as a car, in order to feel secure enough to lend money. Without collateral, a borrower could potentially just take the money and run. In the event that borrowers fail to repay their auto title loans, lenders can repossess the borrowers’ vehicles and resell them to make up for their lost money.
Similar to payday loans, auto title loans have been reported in the news for usurious interest rates and of course the inevitable repossessions. Take for example Brenda Ann Covington, who borrowed $1,500 and put up her 2005 Chevy Silverado as collateral. She ended up owing $4,100, according to Reason Online Magazine.
While this is bound to happen to a certain fraction of borrowers, just like home foreclosures have to mortgage borrowers, this is not reason enough to outright ban what is a reliable method of borrowing for many struggling Americans.
It’s the Economy, Stupid
The recession is still sitting on Americans’ proverbial backs. The White House and Federal Reserve can state the recession is over from an economic and statistical perspective, but far too many Americans are unemployed or underemployed for this to be considered a normal economy. In hard times such as these, people have limited incomes if any income at all. This makes borrowing money sometimes a necessary decision between falling into debt or going hungry. Removing the ability to make this decision is not something governments should be involved in.
The housing market collapse, combined with damaged credit scores, bankruptcies, and low incomes, has led to homeownership being less common. As a result, a car is the most valuable item many people have once their savings and homes were depleted or foreclosed upon, respectively. This one valuable asset is the best collateral many people have in order to secure financing in desperate times.
Banning auto title loans will only result in people seeking loans from other sources, such as loan sharks or online payday loans, which could potentially be from unlicensed or unverified lenders. In a way, it is akin to banning prescription medication, forcing the ill and sick to look for pill pushers in order to find the medicine they need. Banning a problem doesn’t solve its cause—it only sweeps it under a rug as America learned long ago during Prohibition.