March 24, 2020 by Clarissa Ayala
National Consumer Protection, Part 4: Title Loans and Payday Loans in Texas
If there is a universal language everyone speaks, it’s money, and the lack of it is a familiar and ever-present obstacle for most people. In the United States, borrowing money is all but inevitable if you want a car, a house, tuition money, or even something as simple as a mattress. Credit is not only helpful but necessary in the long run for US citizens, and it can make or break your qualifications for borrowing money. An average citizen’s credit can be affected by nearly anything, from a landlord’s mandatory background check to a forgotten credit card payment; many citizens find themselves struggling to be approved for certain loans without the support of their credit score. Therein lies the beauty of high interest, short-term loans designed to act as “debt traps.”
Payday loans are usually for small amounts of money (around $500 or less) that are due back by the borrower’s next payday (2 to 4 weeks). Borrowers are required to write out a post-dated check for the original amount, plus a sizable finance fee. Alternatively, the lender may ask for access to the borrower’s bank account to ensure payment.
In Texas, if the loan in question is less than $30, for example, you owe an additional $1 for every $5. While payday loans are considered legal in the state of Texas, with an interest rate (APR) of 662% on average, without any rollover allowance. In contrast, credit cards usually have an APR of between 12-30%.
The map below illustrates by color, the states with highest payday lending interest rates. (per CNBC)
Payday loans are often last resorts for people who do not have the credit scores to be taking out more reliable loans, like a credit card cash advance, with the main difference being the amount of finance charges that stack up. What makes these loans most appealing is that they have no qualifications (good credit score, credit history in general) and thus, are rather popular with people struggling to make ends meet. However, most people end up taking out a second payday loan to keep up with the first one and find themselves trapped in a cycle of indebtment.
Title loans operate similarly but use your car title as collateral. Borrowers usually have 30 days to pay back for the loan while lenders hold their car title. You can often borrow between 25-50% of the value of your car, and while you are allowed to continue using your car, copies of your keys may be made, and a GPS device may even be installed in order to keep track of it. Thus, if a borrower is unable to pay back the title loan, lenders can easily repossess the car as payment.
While payday loans should never be your first choice, they may be useful if you are in an extenuating circumstance where you need some extra money for a car repair or a hospital bill. However, those living paycheck to paycheck should be advised against them as they can be nearly impossible to pay off.
Title loans are even more dangerous, as the possession of your car could lead to greater issues that prevent you from getting paid, such as transportation to and from work. According to a study done by the Consumer Finance Protection Bureau, one out of every five loans ends with the borrower’s car being repossessed.
Lone Star Legal Aid is a 501(c)(3) nonprofit law firm focused on advocacy on behalf of low-income and underserved populations. Lone Star Legal Aid serves millions of people at 125% of federal poverty guidelines that reside in 72 counties in the eastern and Gulf Coast regions of Texas, and 4 counties of southwest Arkansas. Lone Star Legal Aid focuses its resources on maintaining, enhancing, and protecting income and economic stability; preserving housing; improving outcomes for children; establishing and sustaining family safety and stability, health and well‐being; and assisting populations with special vulnerabilities, like those who have disabilities, or who are elderly, homeless, or have limited English language skills. To learn more about Lone Star Legal Aid, visit our website at www.lonestarlegal.org.
Media contact: Clarissa Ayala, cayala@lonestarlegal.org
