By Cindy V. Culp

Tribune-Herald staff writer

Businesses that promise fast cash in exchange for people putting up their vehicle as collateral are becoming more common across the state, including here in Central Texas.

Local ads for so-called auto-title loans tout them as a good way to get cash for the holidays or unexpected expenses. But consumer groups are urging people not to fall prey to what they say is one of the riskiest financial products on the market.

“For a lot of low- and moderate-income families, their vehicle is the most valuable asset they have,” said Jean Ann Fox, director of financial services for Consumer Federation of America. “. . . You can risk losing a $3,000 car because you borrowed $300.”

Title loans work like this: A consumer wanting cash agrees to put up his or her vehicle as collateral. The title must be clear, meaning the consumer owns the vehicle outright.

The company looks up the vehicle’s value and then makes a loan offer based on that. The most companies will lend is typically 33 percent of the value.

Once the loan is made, consumers have to pay the money back after a specified amount of time, usually a month. If they don’t, the company has the right to take the vehicle and sell it to repay the loan. Often, a company will request a copy of the vehicle’s keys before the loan is made to assist with that process if necessary.

The catch is that the loans come with high interest rates and hefty fees, Fox said. The annual percentage rate averages about 300 percent, she said.

Worse, many people are forced to “roll over” the loan when they can’t pay it back within the specified time, Fox said. That means they extend the loan for another month, incurring more interest and fees. One study of the industry found that the average customer rolls over a title loan seven times, she said.

The end result is that people can pay hundreds of dollars per month to keep their car without ever paying down the original loan amount, Fox said. In the end, that burden becomes too much for about 12 percent to 13 percent of customers, who lose their vehicles, reports on the industry have estimated, she said.

Information on the car title lenders is difficult to come by, because the companies that offer the loans usually use loopholes in financial laws, allowing them to dodge regulation. In Texas, the law these businesses operate under was intended for credit-repair companies, not short-term loan lenders, said Rudy Aguilar of the Office of Consumer Credit Commissioner, a state agency that regulates the credit industry. A loophole in that law allows them to charge whatever interest rates and fees they want, he said, and they do not have to be licensed by the state.

The number of title loan businesses in Texas has jumped over the past two to three years, Aguilar said. Some businesses offer a variety of loan products, including payday loans. But most that offer title loans do only title loans, he said.

Some lawmakers have attempted to impose regulations such as rate caps on the firms, but have been unsuccessful, Aguilar said. However, his office has gotten a flurry of inquiries about the issue from lawmakers and consumer groups in recent weeks as the next session of the Texas Legislature looms in January, he said.

Texas’ slowness to act may be why more of the businesses are popping up here, Fox said. About half of the states have outlawed title loans, she said, while others have imposed rate caps or other regulations.

“Texas needs to get a grip on predatory small loans,” she said.

Industry officials, however, say Texas is doing consumers a service by allowing title loans. Scott Sheehan, an attorney for the Consumer Service Alliance of Texas, which represents credit services organizations, including title lenders, acknowledged that title loans are more expensive than traditional loans. However, he said they can be less expensive than other alternatives, such as payday loans or recurring overdraft or late fees for consumers who are short on cash.

Title loans carry added risk in that people can lose their vehicles, Sheehan said. But they also provide added benefit because loans with collateral tend to be less expensive than unsecured short-term loans, he said.

The key is that consumers need to know their options and then shop around before getting any type of loan, Sheehan said.

“Consumers should have basic choices in the marketplace,” he said. “Everything is fully disclosed.”

cculp@wacotrib.com

757-5744