By Jim Pepper, Contributor to US Daily Review.
In these economic times, a blight has descended on some of our cities across the nation. These are the “Title Loan”, Payday Loan and Pawn Shop businesses.
“Title loans” are loans made on the security of automobile titles, generally for one month terms. The lender will lend a fraction of the book value of a fully paid-for automobile. If the loan is not repaid, the lender will repossess the automobile.
The rate of interest on these loans ranges from about 22% to 25% per month, averaging around 244% per year. On a loan of $1,000, that could be as much as $250 in one month.
If you are even one day late, the lender can repossess your vehicle. In order to get back your vehicle you may have X number of days to pay off the loan and any fees for repossession, storage, etc. In many cases these fees are over 100% of the initial loan. This could mean $2,000 for a $1,000 loan.
The title lending industry has grown tremendously in recent years in states that have failed to take adequate steps to protect borrowers. Low-income individuals are frequent borrowers of title loans.
Title and payday lenders surveyed in aMissouriaudit estimated that 70% of their borrowers earned less than $25,000 per year.
Title lenders have sought to hide the true nature of their products in order to exploit loopholes in existing laws – pretending, for example, that their abusive loans are “sales and leasebacks” or “pawns” when in fact that is not the case. They are predatory by the nature of their business.
In light of the title lending industry’s history of evasions and abusive practices, cities that permit small loans to be secured by the title to the borrower’s vehicle need to restrict the proliferation of these businesses until the State enacts strict legal requirements to ensure that borrowers are well protected.
A payday loan (also called a paycheck advance) is a small, short-term loan that is intended to cover a borrower’s expenses until his or her next payday. The loans are also sometimes referred to as cash advances, though that term can also refer to cash provided against a prearranged line of credit such as a credit card. Legislation regarding payday loans varies widely between different countries and, within the USA, between different states. Due to the extremely short-term nature of payday loans, the difference between nominal APR and effective APR (EAR) can be substantial, because EAR takes compounding into account. For a $15 charge on a $100 2-week payday loan, the APR is 26 × 15% = 390% but the EAR is (1.1526 − 1) × 100% = 3,685%.
Provided are just two reports you need to read on this issue.
- One from the Institute on Public Policy, University of Missouri
- Testimony from a lawyer to the Illinois State Finance committee.
I would ask that everyone take time to understand how this affects residents and neighborhoods, not just a physical property.
The government is supposed to protect the welfare of its residents. From our city code “We recognize that the chief function of local government, at all times, is to serve the best interests of all the people and to keep the community continually informed about municipal affairs.”
Restricting the proliferation of “legal loan sharking” within any city would be a start.
Jim Pepper is a former Mayor and City Councilman in St. Louis County, MO. Jim is currently a Councilman in O’Fallon, MO, a city of approx. 80,000. Jim also spent 35 years in the corporate world of Xerox.