Even with a full-time job, Shanell White found herself in financial straits. Her 12-year-old car needed new brakes. On top of rent and college courses, she became legal guardian for her infant niece, which meant diapers, baby food and $300 a month for day care.
With no savings and poor credit, the single Sacramentan couldn't qualify for a conventional bank loan, and her monthly paycheck was stretched to the snapping point.
"It was an emergency. I had no savings and was going negative every month," says White, 38, a program specialist for the state Department of Corrections and Rehabilitation.
Desperate for cash, she borrowed against her only asset: her car. Answering an online ad in January 2009, White took out a $3,900 loan on her aging white Lexus SUV, signing a three-year contract for monthly payments of $290. In a box above her signature, the loan's terms were plainly stated: An annual percentage rate of 79.9 percent and total finance charges over three years of $6,541.44.
By the time her 36-month contract was nearing completion, White had paid more than $11,000, including an extra $1,100 in fees to get her Lexus back after it was repossessed for several late payments. But when she went to make her final payment, White was stunned to discover that with interest, penalties and a balloon payment she still owed another $3,714. She declined to pay. Ultimately, the car was repossessed a second time, in August 2012.
White is now suing the loan company, Wilshire Commercial Capital of Los Angeles. Efforts to get comment from a Wilshire representative were unsuccessful.
A growing number of title loan companies such as Wilshire are charging high interest rates to California consumers who are desperate for cash. California is one of a minority of states that allow such loans at all.
Nearly 100 companies with multiple locations are licensed in California to issue auto title loans and the number is rising, according to the state Department of Business Oversight. Last year, there was a 35 percent jump in the number of lenders offering title loans, from 59 companies in 2011 to 80. So far in 2013, another 19 have been licensed.
In 2011, the most recent year for DBO data, Californians took out 38,148 auto title loans, averaging $3,500 each.
Auto-title loan ads populate the Internet and airwaves with catchy names like "INeedCashNow.net," "PinkSlipLoan.com" or "123FundMe.com."
Their pitch is typically the same: Get fast cash with no credit check, based on the value of your vehicle. Bad credit or bankruptcy? Not a problem. No long-term job history? No worries.
Consumers hand over their cars' pink slips as collateral. If they default, their vehicle is repossessed and sold by the lender.
"It's outright predatory lending," said Bryan Kemnitzer, a San Francisco consumer attorney, who started getting complaints several years ago about Californians losing their cars to auto-title lenders.
In February, his firm filed a lawsuit in Sacramento Superior Court, seeking compensation for White and all California consumers who took out auto-title loans between Jan. 1, 2009, and Jan. 1, 2013. It was filed against Wilshire Commercial Capital, which also does business as 1800CARTITLE.com and Wilshire Commercial Credit.
A similar lawsuit by Kemnitzer's firm was filed in Southern California on behalf of Corona resident Ronald Davis, who took out a $5,000 auto-title loan at 140 percent interest from Car Capital Inc. in June 2007. According to the suit, he made payments totaling more than $21,200 in 3 1/2 years. In April 2012, the company repossessed his 2005 Chrysler Touring sedan, claiming he owed another $14,555.
According to Kemnitzer, the class-action status of the Southern California case is pending. White's lawsuit was denied class-action status by the court and was sent to arbitration. No arbitration date has been set.
Auto-title lenders say they're providing a needed consumer service, offering cash loans to people with no other options because of poor credit or no access to traditional bank loans. They also say the risky nature of the loans necessitates charging high interest rates.
Considered "subprime financial products" by state regulators, auto-title loans have been targeted by consumer groups that seek to limit the triple-digit interest rates or ban the loans altogether.
"The biggest problem is that you are putting such a valuable asset your car at risk. Particularly in California, where public transportation is not readily accessible, having a car isn't a luxury," said Maria Asturias, of the Center for Responsible Lending in Oakland. "It's a necessity to keep your job, get kids to school, drive to medical apppointments."
In California, interest rates are capped at 30 percent for consumer loans below $2,500. For loans above that amount, there is no limit on interest rates, which critics say has fueled a boost in auto-title lending in California.
Efforts to clamp down are not getting much traction. In 2011, state Assemblyman Roger Dickinson, D-Sacramento, introduced a bill that proposed capping interest rates on car-title loans at 36 percent. It included other consumer protections, such as an extra 30 days for borrowers to repay before their vehicle is repossessed.
The bill also required loan documents to carry a warning: "This is a high-cost loan. You may be able to obtain a loan from another source at a lower rate of finance charge. Think carefully before you decide to accept this loan."
Despite being scaled back the 36 percent cap was dropped altogether the bill died in 2012 in the Assembly Banking and Finance Committee amid opposition by small-loan lenders.
"There's very little appetite in the Legislature for interest rate ceilings. It was very clear that was going to be a tough nut to crack," said Dickinson, who plans to reintroduce a similar bill next year.
Nationally, only 21 states allow auto-title loans, and some of those, like Florida, have capped the allowable interest rates. The U.S. military also bans lenders from charging more than 36 percent interest on auto-title loans to service members.
"Most states don't allow auto- title loans. Why should California be behind on this issue?" said Rosemary Shahan, president of Consumers for Auto Reliability and Safety, who testified in favor of Dickinson's bill.
Opponents of auto-title loans advise consumers to use them only as a last resort.
"These products are dangerous for people," said Asturias, who urges cash-strapped consumers to look at alternatives such as: borrow from friends or family; obtain a loan from a bank or credit union; get money-managing help from a credit counseling agency; or trade in the vehicle for a less expensive model, rather than borrow against it.
"Maybe you can sell it and buy a less expensive car," Asturias said. "Use the rest to give yourself a cushion and pay off your expenses, without putting (your vehicle) at risk."
For White, a single mom who's now raising a daughter of her own in Elk Grove, it's been a hard-earned lesson.
"I can't get my car back but I do want other people in my situation to know there are consequences to taking out an auto-title loan. It's not a good loan for anybody."
AUTO TITLE LOANS
What they are: Short-term, high-interest loans that use your vehicle as collateral. Most loans are due in 30 days; at 25 percent monthly interest, the annual rate is 300 percent.
How they work: Typically, borrowers must own the vehicle outright. No credit checks and minimal proof of income are required. The borrower hands over the vehicle's pink slip until the loan is repaid.
Typical borrower: Takes out a 30-day loan of $1,042 that's renewed eight times, paying back $3,391 triple the amount borrowed.
Where offered: 29 states and Washington, D.C., do not allow auto-title loans or severely limit interest rates. A number of online lenders operate offshore or on Indian tribal lands, where they're not subject to U.S. regulations