Proponents of car title lending say these lenders serve an important purpose by providing short-term emergency loans to people who need to address an immediate financial crisis. They applaud the CFPB’s decision to delay the underwriting rule.
The Community Financial Services Association of America, which represents a number of companies in the nonbank short-term lending industry (also known as the payday lending industry), says government should focus on addressing illegal loan sharks rather than the short-term lending sector. Over-regulation would force short-term lenders to go out of business and leave customers vulnerable to dangerous, illegal alternatives, they say.
But if you have no socked-away savings and you’re not in a credit union or lending circle, you still have alternatives that are better than taking a car title loan when you need money quickly
A libertarian think tank, the Competitive Enterprise Institute, argues that the underwriting requirement would make it harder for financially distressed borrowers to obtain the quick cash they need.
“But it’s not quick cash if it becomes a cycle of unaffordable debt,” says Suzanne Martindale, senior policy counsel at Consumer Reports. “These lenders buy up storefronts in underserved communities. They do aggressive Google and Facebook ads, radio, TV, whatever is needed to get you in the door. But once they get you to start borrowing, they will make a handsome profit if they can get you stuck in a longer cycle of debt.”
Companies offering loans with lower (two-digit) APRs and fees do exist in the short-term lending industry, Martindale says. But as these firms have fewer resources than the three-digit lenders to invest in marketing and search optimization, “when you go to Google and type in ‘get a $1000 loan,’ their stuff doesn’t pop up.”
How to Protect Yourself
The best way to avoid problems when you have a cash-flow emergency is to prepare for the possibility. Most financial experts recommend having an emergency fund with enough money to cover three to six months of expenses. One way to help fund that account is to look at your monthly bills to see where you might trim expenses. Perhaps there are phone or cable services you could give up. In the Pew study, three-fourths of title loan borrowers admit they could have cut back on their expenses to avoid taking a car title loan.
Another way to prepare yourself for a financial emergency is to join a credit union that offers affordable payday alternatives, McClary suggests. Some credit unions require that you join through a church, an employer, or a community group. To join, you purchase a share for $5 to $25. Credit unions may also charge a nominal fee to open your bank account. The National Credit Union Administration has a credit union locator and provides detailed information on how to join.
Joining a lending circle is another alternative. These are groups that encourage you to save and raise your level of financial stability. When you join a lending circle, you pay a certain amount, such as $50 or $100 a month, into a pot of money that can be used to provide interest-free loans to members of the circle. The Mission Asset Fund is a nonprofit organization that can help you join a circle. “Lending circles are a tremendous resource, and one that has helped a lot of people,” McClary says.
For example, if you’re a member of the military or a qualified dependent, you can get a short-term emergency loan for zero percent interest from a military relief organization such as Army Emergency Relief, the Navy-Marine Corps Relief Society, and the Air Force Aid Society. Every branch of the military has one, McClary says.