Auto title loans are short-term loans granted to consumers for the rights to the car title. These loans are often thought of as emergency loans and carry higher interest rates than normal consumer loans. The incentive for unsuspecting consumers is that lenders usually do not check credit--instead, they assume a risk because they can repossess the vehicle if need be. The business of auto title lending has been scandalized after scores of investigative studies report the business is a front for predatory lending.
Federal Regulation
There is no federal government body that controls the distribution of auto title loans. Instead, it is up to the State legislatures to determine guidelines for lending. Beginning in 2004, states began to step up oversight of these loans often setting rate caps and restrictions on lending to those in the armed services.
Illinois
On April 1st, 2009, Illinois enacted a sweeping reform bill for auto title loans. The new regulations include: a loan amount maximum of $4,000; a limit on monthly payments (no more than 50 percent of a borrower's income); creating a database of all title loans on record (which is used to track loans and ensure compliance with the new restrictions); and, a mandate that compels all title loan lenders to inform potential customers with literature about responsible credit and money management.
California
California has looser regulations than many states. While they do enforce rate and monthly payment caps, there are loopholes that allow lenders to skirt the restrictions and charge whatever rate and payment the lender and borrower agree to. (For example, if a lender can persuade a customer to take more than $2,500, he or she can charge any rate.)
Rapid Growth
Before the restrictions started coming down, some lenders were charging as much as 300 percent interest over the course of the auto title loan period. This enormous profit led to a boom in the industry--particularly in the southern states like Mississippi, Alabama, and Tennessee (where there are often more than 100 auto title lenders in a single county).
Interest Rate Caps
Some states (Connecticut, Maryland, Maine --15 in all) have placed an outright ban on auto title lending. Others have simply capped the rates at which these companies can charge. In general, the rate caps hover between 30 percent and 38 percent--a massive decrease in the previous, and highly unethical, triple digit rates.
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