June of 2010 saw the end of payday loans in Arizona, thanks to advocacy groups and voters protesting the industry’s triple-digit rates that preyed most heavily on those of limited financial means.
Nearly half of Americans live paycheck to paycheck, meaning they have no room in their budgets for even minor emergencies, such as a flat tire. A simple car repair brings with it enormous and long-lasting repercussions. After all, it isn’t as though someone living paycheck to paycheck can afford to be without a vehicle. How else will they get to work? They can’t miss a paycheck, or afford to take time off work.
Payday lenders took advantage of this reality (and still do in many states). They offered small loans – the average loan amount is $375 – with no credit checks but enormous fees and interest rates. How enormous? That $375 loan costs the borrower an average of $520 just in interest rates and fees, meaning he or she paid $895 for a $375 loan. The average time for repayment was approximately 16 weeks.
If you question whether these lenders prey on low income families (there’s a reason they’re called “predatory lenders”), the Pew Research Center points out that these companies congregate in areas with at-risk populations:
- 20 percent of residents live in poverty
- Unemployment is approximately 30 percent higher than that of the state overall
- The average income level is around half of the state’s average income level
Exit Payday Loans, Enter Title Loans and Registration Loans
The good news is that Arizona outlawed payday loans. The bad news is that car title and registration lenders stepped right in to fill the void, often in the exact same locations as the payday lenders. As of June 2015, there were 633 licensed title lenders in Arizona, as well as an untold number of unlicensed lenders.
A title loan is similar to a regular car loan. Borrowers must own their vehicle outright, and they their vehicle as collateral. Unlike a standard car loan, though, there are no interest caps with title loan companies.
Registration loans allow you to use your vehicle as collateral, even when you’re still making car payments on your traditional auto loan. Again, these loans have no interest caps.
The fees and interest on registration and title loans are just as outrageous as those charged by payday lenders. According to that same Pew report, the average amount of a title loan is $1,000, with annual fees averaging $1,200. That’s a rate of 240 percent.
These lenders also focus their efforts in vulnerable communities. For example, Arizona has 1,427 Census Tracts, with 385 tracts housing at least one predatory lender. Of those, 135 tracts have title lenders but no traditional bank branches. According to census data, unemployment and poverty levels are higher, and household income rates are lower in every one of these areas.
Alternatives to Predatory Loans
I understand that these loans fulfill a very real need felt by millions of people every year. My complaint is not against the borrowers but the lenders, whose product may feel like a lifesaver but in reality nearly always makes a bad situation worse. Until legislation catches up with reality, though, all I can do is offer financial advice that may help these borrowers.
First, before entering one of these loan agreements, think carefully about your options. Your alternatives depend on your situation, of course. For example, if the reason for borrowing is making a payment with a creditor, late fees are substantially less than the fees you’d pay to a title loan company. You should also try talking directly to the creditor. You may be able to negotiate a payment plan, or make a late payment.
You can also talk to your bank or use its overdraft protections. A one-time $40 charge for a bounced check stings, but it hurts a lot less than hundreds of dollars in fees and interest. You may be able to get a small loan from a traditional bank.
Some employers offer pay advances. You lose nothing by asking yours. If you have a credit card, use it instead. If it’s a bill you can’t pay with a credit card, consider using your credit card for items you normally pay for with your debit card or cash, and save your cash for this expense. Or, use the cash advance option with your credit card.
If a family member has the funds, you can ask for a loan, offering a realistic repayment plan.
If you absolutely have no other recourse, you can take some of the sting out of a title loan. First, do your research, looking for a company with the lowest rates and the best reputation. Second, only borrow what you actually need. Finally, make repayment a priority, paying back the loan as quickly as possible.
The best way to avoid this type of situation in the future is to prepare as best you can for financial emergencies. Most financial advisors suggest their clients have at least two months worth of living expenses in their savings. Work your way toward this goal, starting with the smaller goal of saving an amount equal to one of your paychecks. Look for fat to trim from your budget – eating out, coffee on the go – and place this amount in your savings. Even small amounts add up quickly.
You can also apply for a credit card if you don’t have one. Just be careful to keep it for emergencies instead of racking up credit card debt.