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How Should Borrowers Be Careful When Taking Out Car Title Loans?

SCOTT SIMON, HOST:

Diane Standaert of the nonprofit Center for Responsible Lending in Washington, D.C., joins us now. Thanks very much for being with us.

DIANE STANDAERT: Thanks for the opportunity to speak with you.

SIMON: We're talking about car title loans and consumer finance loans. What are the differences?

STANDAERT: Car title loans typically carry 300 percent interest rates and are typically due in 30 days and take access to a borrower's car title as security for the loan. Consumer finance loans have no limits on the rates that they can charge and also take access to the borrower's car as security for the loan. And so in some states, such as Virginia, there's very little difference between the predatory practices and the consequences for consumers of these types of loans.

SIMON: How do people get trapped?

STANDAERT: The lenders make these loans with little regard for a borrower's ability to actually afford them considering all the other expenses they might have that month. And instead, the lender's business model is based on threatening repossession of that collateral in order to keep the borrower paying fees, month after month after month.

SIMON: Yeah, so if somebody pays back the loan within 30 days, that upsets the business model.

STANDAERT: The business model is not built on people paying off the loan and never coming back. The business model is built on a borrower coming back and paying the fees and refinancing that loan eight more times. That is the typical car title and borrower.

SIMON: Yeah, but on the other hand, if all they have to their name is a car, what else can they do?

STANDAERT: So borrowers report having a range of options to address a financial shortfall - borrowing from friends and family, seeking help from social service agencies, even going to banks and credit unions, using the credit card that they have available, working out repayment plans with other creditors. All of these things are better - far better - than getting a loan that was not made on good terms to begin with. And in fact, research shows that borrowers access many of these same options to eventually escape the loan, but they've just paid hundreds of dollars of fees and are worse off for it.

SIMON: Is it difficult to regulate these kinds of loans?

STANDAERT: So states and federal regulators have the ability to rein in the abusive practices that we see in the marketplace. And states have been trying to do that for the last 10 to 15 years of passing and enacting limits on the cost of these loans. Where states have loopholes in their laws, the lenders will exploit that, as we've seen in Ohio and in Virginia and in Texas and other places.

SIMON: What are the loopholes?

STANDAERT: So in some states, payday lenders and car title lenders will pose as mortgage lenders or brokers or credit service organizations to evade the state-level protections on the prices of these loans. Another type of loophole is when these high-cost lenders partner with entities such as banks, as they've done in the past, to again offer loans that are far in excess of what the state would otherwise permit.

SIMON: So if somebody borrows - I'll make up a number - $1,000 on one of these loans, how much could they stand to be liable for?

STANDAERT: They could end up paying back over $2,000 in fees for that $1,000 loan over the course of eight or nine months.

SIMON: Diane Standaert of the Center for Responsible Lending, thanks so much for being with us.

STANDAERT: Thank you very much. Transcript provided by NPR, Copyright NPR.