Virginia Passes Law Limiting Car Title Lending

August 6, 2010

Most consumer advocates consider car title lending to be predatory. One of the main reasons for this attitude is that car title loans usually carry high interest rates. The loan offerings attract people who are already in debt or have bad credit and are unable to obtain a loan through normal bank channels.

Virginia’s state legislature decided to address the issue and has been working on a new bill that will set lending limits on car title loans. The Virginia Senate passed a measure in February and now the state House has followed suit in March. It is expected the Governor will sign the bill into law.

Virginia’s bill accomplishes two things: it creates an interest rate cap and limits loan terms. The new law creates a tiered interest rate schedule. For example, a 22 percent interest rate per month would be the maximum rate on a loan that is smaller than $700. For a loan greater than $1,400 the cap is 15 percent per month. In between $700 and $1,400 there is a tiered schedule of interest rates allowed to be applied based on the loan amount.

Other provisions of the bill include limiting the loan to one year and restricting eligible borrowers. The loan amount must be less than half of the car’s value. The law also prohibits interest from accruing on a loan once the car has been repossessed.

It is interesting to note that the interest rate limits still allow a lender to charge a triple digit interest rate over a period of a year. Some Virginia legislators do not believe the law goes far enough in establishing limits and see the new law as continuing to allow predatory lending though on a scaled back basis.

The final legislation represents a compromise between consumer advocates, lenders, and industry groups. Of course, not everyone is happy with the bill because some say it still allows high interest rates. Individual provisions in the bill strike a sour note with many. But like most laws, the legislation represents a compromise.

This legislation is reminiscent of restrictions placed on payday loans almost two years ago. There have been previous failed efforts to limit car title loan terms, but all previous proposals have failed. This bill is historic in that it not only limits loan terms but places a cap on interest rates.

Car title loans are often sought by the financially illiterate or people desperate for money who also have bad credit or no assets other than an auto. Many people do not understand the terms they are agreeing to when they take out a loan using their car as collateral. Once the loan becomes delinquent, the auto can be repossessed leaving the person with no transportation and a debt they are unable to pay. Though the new legislation still allows what some see as usury interest rates, it is hailed by Virginia consumer advocates and legitimate lenders as important legislation that addresses predatory lending practices.

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