Car Title Loans vs. Payday Lending

by JT McGee

Car title loans are pretty horrendous things.

You sign over your paid off car for a high-interest loan issued on a 25-50% LTV. So the loan on a $10,000 car would be no larger than $5,000. Most are a couple hundred bucks at best, since anyone with half a brain knows that a smaller loan at high interest is better than a large loan at high interest.

The Deal, Yo

So this is what I want to figure out: why anyone ever bothers to turn over a car title. Now, I’ve done some comparison shopping and from what I can tell the only difference between a payday loan and a car title loan is…

The car title.

Seriously. There’s no income requirement differences, no real difference in APR from place to place, and no credit checks any way you slice one of these low end loans. I thought there would be, but there really isn’t at all. Some companies might be willing to give you a little extra money on a debt to income basis if you hand them a car title, but for the most part, one would think there wouldn’t be a real difference for borrowers.

Remember, no one uses either kind of loan to borrow a lot of money. I looked at several different lenders, including to get a feel of how payday loans differ from car title loans.

Auto Finance Makes Sense

I love auto finance. There’s something so interesting about the car market and how people shop for cars, and how businesses make money selling cars.

Anyway, so there’s this publicly-traded company that goes by the name of Credit Acceptance Corporation, and it gives loans to people I wouldn’t trust with $5, let alone a 2-ton truck. Long story short, defaults on their mostly used car loans runs as high as 30%. This company is more of an insurance company than it is a car financing company – really, they just have the algorithms to make this business profitable.

So the point, I guess, is that even on the not-so-sketchy end of consumer finance a ton of people default on car loans. So even more people default on car title loans (I’m just guessing here, but as rates go up I would suspect that credit quality goes down.)

Never Securitize a Loan – Especially at High Interest

It really does the borrower no good to securitize a high-interest debt. The collateral you put on a loan has little to no influence on the rate you pay or the amount you can borrow. Instead, it affects only how much you stand to lose should you default on your debt.

It’s much better to lose a little money than it is to lose your car. I still cannot figure out why a car title loan would ever be a good substitute for a payday loan – everything seems to be exactly the same with or without securitization.

{ 2 comments… read them below or add one }

A Blinkin July 24, 2012 at 17:51

This is interesting. Both are sketchy as hell. I would think the car title loan would have a lower apr, in theory, with the collateral in place if the loan isn’t repaid. I would rather owe a drug dealer than a payday loan company.


A Blinkin July 24, 2012 at 17:54

On a Sidenote…I met a lady a while back that pledged everything she owned as collateral. I couldn’t believe it. Tvs. Dvd players. Furniture. I didn’t want to laugh but I had never seen anything like it.


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