What is a California Title Loan?
A California title loan is a loan secured by collateral under the lending laws of California. To obtain a title loan, a borrower will put up an asset, most often a car, to secure the loan as collateral in case of a default. That is, if the borrower finds themselves unable to make a loan payment, the lender will have the right to repossess the asset and sell it, using the money to cover the remaining balance of the loan. Title loans tend to be short-term (often 30 day payment periods) and small in amount. Further, title lenders have a history of predatory lending, and often set interest rates very high. A common rate of interest for title loans is 25% per month, which amounts to an APR of 300%. In the states where title lending is still legal, laws have been put in place to limit the extent to which title lenders can take advantage of borrowers.
In California, title loan rates can be set at any rate to which the lender and borrower agree, as there is no legal limit to how high they can be set. All that California legislation requires in regards to interest is that it must not be raised upon a default.
While in most states obtaining a title loan will not require a credit check, since title loans are asset-based, not credit based, California requires that lenders investigate an applicant's credit history and financial standing. Before handing out a loan, it must be confirmed that the borrower's monthly debts will not exceed 55% of their monthly income.
Unlike most states, California statute 4973 requires title lenders to investigate an applicant's financial history and ensure that their monthly debts (including the loan payments) do not exceed 55% of their monthly income. Additionally, this statute forbids lenders to increase interest rates in the case of a default.