What's the latest financial scheme to perform a hit and run on people who can't manage their money? It's the car title loan. The cousin to payday loans, these can be just as lethal to a family's finances.

Payday loans, often described as one of the ruinous types of lending tools on the market, now have company. In fact, the new kid on the block, car title loans, are actually proving to be even more devastating to borrowers.

Steep price to pay

Auto owners, desperate for cash, agree to some outrageous terms when they take out a car title loan. First, the borrower must give the title and a copy of his car keys to a lender in exchange for a loan. The loan amounts vary, but they can total up to half the vehicle's wholesale value. The borrower agrees to pay back the loan in one to two months. In addition to the principal, the borrowers must pay staggering triple-digit interest rates and other fees. If the payments can't be paid, the lender can take the car.

Different than payday loans

With payday loans, the most a borrower stands to lose is his paycheck, which is used as collateral. It's a costly penalty, but hardly as debilitating as the loss of a family car.

Car title lenders will argue that their loans aren't nearly as damaging as payday loans. They point out that borrowers can take out as many payday loans as they want, while most car owners can only use one or two vehicles as collateral. This lesser-of-two-evils argument may be factually true, but it doesn't lessen the crippling effect the loss of a car can have on a family.

Government regulation: Mixed results

Despite heavy lobbying on the part of lenders to prevent regulation of car title loans, state governments have begun to take action. Last year, 16 states enacted tougher regulations. Eight states have initiated similar legislation this year. Most regulations include capping the interest rate, particularly when the loan is for a member of the military. Lobbyists are pouring money into the coffers of politicians to beat back the movement, but there's an even greater problem with further regulations.

Many politicians note that any movement to regulate the industry will only sanction its status as a legitimate financial entity. Even with stringent regulations, payday lenders have become widespread, and cash-desperate consumers have flocked to them. A similar result could occur in the car title loan industry.

Lost in the debate is a share of the blame for the borrowers who sign on the dotted line. Beyond the hard luck cases, a significant chunk of the population falls for these loans because they live beyond their means. As long as borrowers continue irresponsible money management, these types of shark-like lenders will always be swimming around and ready to feast on desperate prey. The best way to put the brakes on auto title lenders is to accelerate people's understanding of how to manage their money.

Published on May 25, 2008