Auto title loans may soon be legal in Louisiana

There are a number of ways to borrow money if you should find yourself in a tight financial spot. You can take out a bank loan, borrow against a credit card, or even resort to a payday loan if you are in a real bind. There is an even worse option, though - the auto title loan. Many states wisely ban such lending, but the state of Louisiana may soon legalize it. 

More below.

Car title lending is costly and risky for the borrowers

There are good ways to borrow money and bad ways to borrow money. If you are well off, you can probably stick with the former. If you are poor or lack sufficient credit, you may be stuck with the latter. Clearly the best and cheapest way to borrow money is to take out a loan from a bank. After that, a credit card loan will work, but it comes with a higher interest rate. The most expensive form of unsecured lending would be a payday loan, but interest rates can easily run into the 300-1000% range for a short term loan. It may be hard to believe, but there’s an even worse form of lending that that - the auto title loan. Bad as that idea may be, the state of Louisiana is on the verge of legalizing such lending.

A payday loan is a short term loan of two weeks’ duration. The borrower takes out a small loan in the amount of $100-500 and pays a fee that ranges from $15-30 per $100 borrowed. The borrower writes a check for the amount of the loan plus the fee and postdates it for two weeks. At that time, he or she repays the loan and the fee and the lender tears up the check. If the borrower doesn’t have the money, he or she may “roll over” the loan for another two weeks by paying the fee a second time.

This type of lending is really expensive; interest rates for a $15/$100 fee run 391% per year. But the loans are unsecured, which justifies the high charges. An auto loan against the car’s title works much the same way, but the loan is secured by the title to the borrower’s car. Loans tend to run a bit longer; 30 days is the most common duration. If the loan isn’t repaid, the lender may repossess the car and in most states, may sell it to recoup their money. In some states, such as Georgia, the lender may even keep all of the money, not matter the amount. If the lender receives title to a $10,000 car in exchange for a $1000 loan, they may sell the car for $10,000 and keep all of it.

Given that such loans are secured, one might think that they would be cheaper. That isn’t the case, however, and title loans often have interest rates that average 300-400% per year. The borrower not only has to pay high interest rates, but he or she is also risking losing their car if they don’t pay on time, and that happens fairly often.

Louisiana currently has an interest rate cap of 36% per year. Permitting title loans would raise the rate to 300% and would also put a lot of the states citizens who are already in financial trouble after Hurricane Katrina at further risk. The bill has yet to pass the legislature; one hopes that common sense will win out and that the bill will fail.

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