Auto title loan disadvantages: Valuable assets in untrustworthy hands
By Airman First Class Emerald Ralston, 341st Space Wing Public Affairs Office
/ Published April 17, 2007
MALMSTROM AIR FORCE BASE, Mont. -- Auto title loan companies seem to make it simple to get fast cash. But what they don't make easy is paying that loan back.
These companies generally charge three-digit interest rates on their loans, while borrowers don't always understand the terms and compounded interest.
"State law requires us to make the interest rates very obvious to our customers," said a local title loan company executive who wished to remain anonymous. This statement is true, as the interest rates are in boxes and set in bold type, but the interest rates aren't generally the problem, he said. The compounded interest is the main issue borrowers don't always grasp. Borrowers pay interest on the interest, along with making payments on the principle loan.
"The percentages we charge are based on 25 percent of the individual's net annual income," said aforementioned local auto title lender. "For a seven day loan, 25 percent interest will be charged. Seven days equals roughly 1,300 percent annual percentage rate. For a 14 day loan, the APR would come out to be 651 percent."
Many times, people will borrow money in emergency situations. For example, in December an active-duty member of Malmstrom found himself caught in the whirlwind of debt and misinformation created by these auto title loan companies.
"Recently an Airman assigned to the 741st Missile Security Forces Squadron came to me with a problem he had encountered involving a title loan company in Great Falls," said Senior Master Sgt. Charles Meyer, 741st MSFS First Sergeant. "The Airman explained to me that he had borrowed $800 to pay for plane tickets for his family to attend a funeral back home. He needed the money fast and thought that a title loan was his best and quickest alternative. Using his vehicle for collateral, he walked into the agency and walked out with his money in a matter of an hour."
The matter of compounded interest was not explained to him thoroughly, as he was unaware of the 25 percent charges that would be stacking up every month.
"The loan was taken out in May of 2006 and he had been making payments of at least $200, sometimes up to $240, per month," Sergeant Meyer said. "Since he took out the loan, he had made a total of more than $1,200 in payments on the $800 initial loan and currently had a balance of $1,050. When I asked the interest rate in which the loan was under, the person I spoke with initially told me they charge the maximum allowed by state law. I continued to push and she finally stated the loan interest rate was 25 percent compounded monthly. This was the first time the Airman knew exactly what the rate of interest was on the loan."
"In December, he ran into a financial pinch and was unable to make the payment. He called and asked for relief from the loan agent, who refused. He told them to come get the car he put down as collateral and they refused."
Fortunately for this Airman, his First Sergeant was able to get him some assistance through a very reputable local credit union, who worked for a day and half to help him get qualified for a signature loan to pay the title loan company off.
"The message I would like to convey to our people, both young and old, is this: Be careful about the financial contracts you sign," Sergeant Meyer said. "Read everything and read it again. If you don't understand what you're reading or if you don't get a good feeling about the loan, walk away. Stop and do the math and you'll realize just how much money you are throwing away. There are many reputable businesses that are willing to work with and help our Airmen. There's absolutely no reason I can think of where our people would need to use these places. If an emergency arises and they need help, they need to come to their supervisor or First Sergeant and ask about sensible alternatives."