Some loans can be derisively described as “predatory” because of factors like incredibly stiff interest rates and the loan given to a borrower being a lot less than what the object being put forth as the collateral should ideally have been worth. Meanwhile, the collateral itself can be an object that is incredibly important to one’s livelihood; should the borrower be unfortunate enough not to avoid defaulting on the loan, the lender will take possession of the collateral and sell it in order to recoup the money that they originally handed out. A person can therefore easily enter a long-term disadvantage regardless of how important their circumstances may have made borrowing the money at that point in time.
Perhaps the most representative example of this type of dangerous loan are car title loans, in which the borrower gives up their car in order to borrow an amount of money that can easily be no higher than 40% of the car’s value. Many title lenders provide loans of even smaller figures than that. However, the most threatening aspect of title loans is that the interest rates can reach as high as 300%. If a borrower defaults on this type of loan, the interest rates could well cause the borrower to owe back twice the amount that was borrowed in the first place, and roughly 17% of all persons that partake in a title loan end up losing their household’s primary vehicle.
The sheer size of these interest rates can be single-handedly responsible for causing borrowers to have to spend many months trying to pay back the steadily increasing sum of money that they owe, even if they could have repaid the original sum they borrowed within a reasonable amount of time. This has been described as a deliberate tactic that title lenders use in order to force borrowers to roll over their principal, thus extracting more money from them. While lenders portray these rates as necessitated by their business’ need to protect their assets given how the lenders don’t run credit checks, the average loan borrower has been shown by studies to commit roughly eight rollovers before being able to take back their vehicle or pay back what’s owed.
Arizona is one of twenty states that legalize the issuing of title loans. However, it is also one of only nine such states that imposes a cap of some kind on how much the interest of a loan can raise monthly. This is better for customers in Arizona than customers in other states that offer no regulation on interest rates whatsoever, but Arizona is by no means the most fair of the states that impose these caps.
Arizona’s system prevents monthly interest increases from surpassing 17% a month for small loans under half a grand, whereas 25% a month is the standard in other states. What this means is that, if a person rolls over a $400 loan four times in other states, that person would ultimately owe $800, but in Arizona where the monthly interest cap is 17%, that same scenario would make the person owe $672.
When it comes to loans above $500, the title loan interest rates in Arizona can only raise 15% a month if the loan is under $2500, and it can only raise 10% a month on loans that surpass $5000. Again, these interest rates are comparatively better capped and regulated than those in other states, but the issue that remains in some form is the fact that Arizona still allows repeated rollovers to significantly increase the total amount that must eventually be paid back by the borrower.
Title loans should only be considered if you are not able to find any other option for financial relief whatsoever. Certain agencies, nonprofit or otherwise, can financially assist customers and help them regain water and electricity services. Sometimes, loan options exist in unexpected sources; you may find a small and temporary loan that might be offered by a credit union near you.
But if you cannot avoid relying on a title loan, at least make sure to go in after having carefully worked out how much money you should avoid spending so that you can pay back the loan at the end of the first month. Otherwise, if you default on your loan, a court-ordered repossession agent can spontaneously take your car away regardless of what other possessions you still have inside it, and if the lender still has not fully recouped what it was owed once it has sold your car off, it can sue you to cover the remaining payment necessary.