Title loans are high-cost, short-term small loans secured by a vehicle that the borrower usually owns outright. Such loans, along with payday loans, are used by many people who are shut out from the mainstream banking system. The most common term for title loans is one month, and the interest rate is usually around 300 percent – when expressed as an annual percentage rate.
Many car-title loans combine balloon payments with a short (30-day) loan term, requiring the borrower to repay the full principal plus a substantial fee in just one month. Most borrowers cannot repay the full amount due (principal plus interest) in one payment after just a month and still be able to pay their other expenses. As a result, they end up in a cycle of debt, taking out one loan after another in an effort to stay financially afloat; a loan that is advertised as short-term ends up creating a long-term debt treadmill.
Georgia has banned traditional ‘payday’ loans. But, lenders now market ‘installment’ loans, a product that often drives borrowers into a similar quagmire of debt.
Installment loans have been around for decades. While payday loans are usually due in a matter of weeks, installment loans get paid back in installments over time – a few months to a few years. Both types of loans are marketed to the same low-income consumers, and both can trap borrowers in a cycle of recurring, expensive loans.
Installment loans can be deceptively expensive. Lenders push customers to renew their loans over and over again, transforming what the industry touts as a safe, responsible way to pay down debt into a kind of credit card with sky-high annual rates, sometimes more than 200 percent.