By Jonathan Higuera
Strapped for money to pay debts, Doris Gilder borrowed $400 from a short-term lender in August and used her 2005 Hyundai Accent as collateral, even though it was not paid off.
The 68-year-old Tucson resident had used payday loans in the past to help meet short-term financial needs and had been successful in paying them back.
This time was different. With custody of two great-grandchildren, ages 7 and 11, Gilder said she could not make even the minimum payments on the title loan, which originally called for $106 a month for six months. Now she pays $50 a month and owes much more than the original loan amount.
“When you get desperate, you don’t think about those things [payback terms]. You just need the money,” she said.
Triple-digit interest rates
When Arizona voters rejected a 2008 ballot initiative backed by the payday lending industry to allow it to continue offering triple-digit interest loans, many consumer advocates considered it a major win to protect vulnerable people from vicious debt cycles.
But many didn’t foresee the easy transition some payday lenders would make into title lending. These short-term loans—which use a borrower’s vehicle as collateral—also feature triple-digit interest rates when applied annually, balloon payments toward the end of the loan, high fees for late payments and costly loan rollover plans.
Nationwide, the average title borrower gets a $951 loan that is renewed eight times and eventually pays back $2,142 in interest, according to a February report by the Consumer Federation of America and the Center for Responsible Lending.
In Arizona, vehicle title lending is exempt from the state’s small loan statutes, which cap interest rates at 36 percent on an annual basis. Because title lending falls under different motor vehicle financing regulations, lenders can charge up to 204 percent annually on a $500 loan.
“We just end up playing whack-a-mole at the state levels,” said Kelly Griffith, co-executive director of the Tucson-based Center for Economic Integrity, referring to the transition many payday lenders made to title lending. “At the end of the day, it’s still predatory.”
Consumer advocates are hopeful that the legislature will clamp down on title loans during the session that begins in January.
Steve Jennings, AARP Arizona associate state director, said AARP is willing to mobilize its more than 785,000 members and its cadre of legislative volunteers to fight high-interest lending by title lenders just as it did in the 2008 campaign against the payday lending industry.
“We think people on a limited income are particularly vulnerable to being caught in these debt traps,” Jennings said. “And large numbers of seniors exist right above the poverty line.”
Cases such as Gilder’s are exactly why auto title lenders should be subject to the state’s small-loan interest rate caps, said Jean Ann Fox, of Prescott, senior financial adviser for financial services at the Consumer Federation of America.
Scott Allen, president of the Arizona Title Loan Association and Cash Time Title Loans Inc., which has more than 20 locations in Phoenix and Tucson, disputes the notion that such loans are predatory.
“If consumer lenders could profitably offer a short-term loan at the rate caps that are currently in place for consumer lenders, why aren’t they offering those loans?” he asked. “If we evaporated tomorrow, where would our customers go to get financial services?”
But Fox argued: “The very fact that there is a large number of consumers that have so few options is an argument for more protections. Usury laws and rate caps are needed, as the old saying goes, to protect the needy from the greedy.”
Jonathan Higuera is a writer based in Phoenix.