If you look like a bad credit risk, one way to get a loan is to make sure the loan is “secured” by some assets. That’s part of the reason mortgages have traditionally been available on pretty generous terms—if you can’t pay the loan, the bank can take your house. But in the wake of the housing crisis, there’s been a search for alternatives and for most people the other valuable thing they might be able to use is a car. Consequently, the country’s seen a brisk business in car title loans where you basically mortgage your vehicle.
These tend to have very high interest rates since collection is a pain in the ass, the people who want or need these loans are pretty desperate, and the competition in the market is thin. What’s more, DC and Maryland have passed laws capping the interest rates car title lenders are allowed to charge. The result has been for the whole market to shift to Virginia where Brena Ann Covington finds herself “With an interest rate of around 240 percent, Covington will pay nearly $4,100 to have borrowed $1,500.”
One lesson here is that anti-usury laws don’t always have the impact you might want. But you also see here the potentially valuable role of a Consumer Financial Protection Bureau. People are notoriously bad at math, and the kind of people likely to be in the market for this kind of credit product are especially likely to have relatively weak math skills. Making sure that lenders need to present the terms of the loan in a way that people really understand can make the marketplace work much better. What you need is a world in which the basis of competition is to try to put the best possible deal together that’s still profitable. Under the current circumstances, the basis of competition is all too often to try to do the best possible job of confusing people into entering into a transaction that’s much more costly than they realize.