Vehicle title loans (or title pawns) are big business in Georgia and other states.  A title loan is a loan transaction whereby the borrower hands over the actual title of their vehicle to the lender in exchange for a short term loan based on the value of the vehicle.  For example, if the vehicle is worth $5,000, the lender may loan up to $2,500, or 50% of the value of their collateral.  Normally there is no credit check, and interest rates are very high.  In Georgia, the annualized rate can be as high as 300% the first year and 150% after the first year.  A title loan is a secured loan, meaning they can take their collateral (the car) if the borrower defaults. Since the borrower remains in possession of the vehicle during the loan term, the lender will normally repossess the vehicle after a default (sometimes the next day).  The lender, at that point, effectively owns the vehicle and the relationship has ended.  Because title loans are generally non-recourse, meaning the lender can only look to the vehicle for payment and not the borrower, the borrower has no further liability.  They also no longer have the car!

Much like pawn shops and payday lenders, a huge portion of the title lenders’ income comes from renewals or roll overs of the title loans.  In the example above, if the borrower got a loan for $2500, she would owe (in Georgia) a maximum fee of $625.00 (or 25%) at the end of 30 days.  If she could not pay off the entire $2500, she would pay $625 to renew for another month, and so on and so on.  This means that after 4 months, she has paid as much in fees as the original loan amount, which she still owes!  In four more months, she has paid double the original loan, and still owes the $2500.  If she is one day late in month nine, the lender can take the vehicle and not only has she lost double the amount of the loan she has lost the vehicle too.  In turn, she may not be able to get to and from work.  I have actually spoken to a couple of borrowers who have renewed for so long the lender did not even bother picking up the car after a default.  The lender had already made several times the value of the vehicle in monthly payments and the value of the vehicle had declined over time so it wasn’t worth picking up.  At least the borrower still had their cars, but they never knew when the tow truck would come in the night and they could never sell it.  Title lenders heavily market title loans as a great deal for emergency funds (see the picture above), and many people fall for the sales pitches during hard times, but they are almost always a really, really bad deal that can lead to a much bigger financial crisis.  Avoid them at all costs.