Auto Title Lending: Plundering and Devouring the Poor?

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I spent some time recently working for Faith for Just Lending, a national coalition of faith-based groups working to promote justice in lending practices. During that time, I interviewed many people from all over the country, and I was struck by the stories that I heard. One story that is fairly representative is that of a young father caring for his four children and his wife who is unable to work. Due to a shortage of well paying jobs in his immediate area, this man (who I will call John) works a series of odd jobs for farmers. With his work slowing down considerably during the winter months, John took out a title loan on his vehicle. The original loan amount was for $500 to pay for rent and help with food costs. Because John was unable to get back to work for a period of three to four months, the loan kept ballooning with fees and interest until John owed over $2000 just three months after taking out the loan. He ended up losing his vehicle, which hurt his family's mobility and his own ability to work steadily. 

Put yourself in John’s shoes, and let’s imagine you realize that you are going to come up $500 dollars short on your budget this month. Where would you go to get this money? Perhaps you could take the money out of an emergency savings account or maybe you could turn to your family or friends to borrow the extra cash. Not everyone has these options though, and many don’t have these kinds of financial or social resources available to them. Their friends and family may not either. In that case, where do they turn? One product that makes itself readily available to those in need is the auto title loan. With some similarities to its cousin, the payday loan, the auto title loan is an asset-based loan made against the collateral of the borrower’s vehicle title. Essentially, the borrower takes out a loan of several hundred dollars and then turns the vehicle title over to the lender, while still keeping the car. However, if the borrower cannot pay when the loan comes due, the car can be repossessed by the lender.

From this description, we can easily see how these types of loans can be problematic, and their terms are even worse. Usually, the loans have short terms, often only thirty days, and they require a lump sum or “balloon” repayment. This means that borrowers must pay the full principal and interest in a single payment or risk losing their vehicle. Faced with this choice, borrowers who cannot pay what is required must “roll over” or renew the loan by paying a fee and extending the loan for another 30 days. The average customer renews their original loan eight times before paying off the loan and one out of every six auto title borrowers actually incur repossession fees on top of their loan fees.

In addition, lenders base the loan amount on the value of the borrower’s car rather than on the borrower’s ability to repay. This signals that the crucial factor for the lender here is not the ability of the borrower to repay, but rather the lender’s ability to collect. The average loan amount for a vehicle title loan is about $1,000, but the average amount paid in loan fees is over $2,300. This results in a business model that actually incentivizes the lender to lend to those who cannot repay

Obviously, John’s situation is distressing, and yet every month, significant numbers of lower-income Americans similarly come up several hundred dollars short in their budgets and expenses. Many feel that payday and car title loans are their only options. Perhaps it is easy to dismiss these types of lending practices as uncomfortable and distasteful realities. After all, both parties entered into what is a legal agreement in many areas of the United States. However, for Christians, there is more to this issue than simply an unfortunate intersection of high demand for these loans and high risk of default for the lender. The problem of predatory lending is one that connects to Biblical themes about justice and care for the poor.

A Biblical Perspective

Neither the Old Testament nor the New Testament is silent on the topic of money lending. The Mosaic Law clearly states in Exodus 22:25 that“if you lend money to any of my people with you who is poor, you shall not be like a moneylender to him, and you shall not exact interest from him.” Ezekiel 18:7-8; 13 explains that the righteous do not “lend at interest or take any profit,” and that those who do “shall not live.” Leviticus 25:35-36 says if your fellow Israelite is poor do not take any interest from him. In Psalm 15: 1-5, the psalmist lists putting “out money at interest” in the same breath as taking bribes, slandering, and doing evil to one’s neighbor.

We do have a clear mandate to prevent the exploitation of the poor, vulnerable, and marginalized in our society.

The New Testament echoes many of these ideas as well. In the Sermon on the Mount, Jesus concludes the famous passage about turning the other cheek with a command to “give to the one who begs from you, and do not refuse the one who would borrow from you” (Matthew 5:42). These ideas are similar to those in the Sermon on the Plain, recounted in the Gospel of Luke, chapter 6. Here Jesus tells those gathered that “if you lend to those from whom you expect to receive, what credit is that to you? Even sinners lend to sinners, to get back the same amount. But love your enemies, and do good, and lend, expecting nothing in return, and your reward will be great, and you will be sons of the Most High, for he is kind to the ungrateful and the evil. Be merciful, even as your Father is merciful” (Luke 6:34-35).

The Christian Tradition

Interpretations of these passages have changed throughout the history of the church. Now used as a term to describe loans that are considered unconscionable and exceed the maximum rate allowed by law, “usury” historically referred to charging interest of any kind. The early church actually took the position that Christians should not lend money at interest at all, condemning all forms of lending at interest. During the medieval period, the theologian and thinker Thomas Aquinas also denounced the practice of usury, except in a few limited situations. Much of this perspective is alien to us in our capitalist economy today, partially because money at that time was still viewed as being “sterile” and the concept of the time value of money was still developing.

As medieval economies were transformed during the Reformation and the Renaissance, European trade grew more sophisticated, and Christians began to realize the potential of putting their money to work. Some attribute John Calvin with lifting the Christian prohibition on lending at interest and fully embracing modern capitalism. A resident of an urban area and a trained lawyer who understood commerce, Calvin had a more modern view of money than his early church predecessors. However, his “Letter of Advice on Usury” is still fairly conservative in its allowances for lending at interest. Commenting on the passage of Luke 6, Calvin writes that Jesus “corrects the world’s vicious custom of lending money and urges us, instead, to lend to those from whom no hope of repayment is possible.”  In the same letter, Calvin writes that “usury almost always travels with two inseparable companions: tyrannical cruelty and the art of deception.”

When addressing the Old Testament passages regarding usury, Calvin’s central point was that these prohibitions against interest are a part of the judicial law and need to be kept in their proper context, which is the theocratic nation of Israel that existed in the Old Testament. Justifications for prohibiting lending at interest based on those passages no longer apply in his view. However, the moral law that undergirds those directives is still in effect and should be taken into account. Calvin perhaps best sums up his thoughts on this subject through his commentary on Psalm 15 and Leviticus 25. He writes that this prohibition “was, indeed, a part of the judicial law which God appointed for the Jews in particular, but it is a common principle of justice which extends to all nations and to all ages, that we should keep ourselves from plundering and devouring the poor who are in distress and want.” 

What Does This Mean for Us Today?

Clearly, the Bible emphasizes providing justice for the needy and preventing exploitation of the vulnerable. While the specific Old Testament prohibitions against lending at interest are a remnant of the judicial law, the moral law behind them remains intact. When we encounter practices that engage in “plundering and devouring” the poor, we should speak out and work for solutions to the underlying problems. 

The fact that so many people feel that they need to turn to these types of lenders should come as a harsh wake-up call for churches and Christians across the country. The Biblical passages cited here go beyond simple condemnation of usury to actually commanding that Christians “give to the one who begs from you, and do not refuse the one who would borrow from you” (Matthew 5:42). Those who cannot repay what they borrow are designated by Christ as exactly those to whom Christians should give, but we have allowed predatory lenders to take ownership of our market for giving. Churches have a duty not only to teach and model responsible stewardship, but also to offer help to neighbors in times of crisis.

The government also bears responsibility to protect its citizens, particularly the most vulnerable. In this case, that means lower-income Americans, especially those on fixed incomes. In fact, twenty-nine states throughout the country currently have caps on interest rates that effectively eliminate predatory auto title lending practices. Additionally, the 2006 Military Lending Act (MLA) limited rates on loans to all US military personnel, traditional targets of predatory lending, to 36 percent APR. The MLA also bans the use of auto titles as loan security for military personnel.  However, for civilians, twenty-one states permit auto title lending through their lack of interest rate caps, and many of these states allow as much as 300 percent APR to be charged on these loans. 

While government must take an active role in prohibiting usurious loans, lenders themselves have a responsibility to extend loans at reasonable interest rates based on the borrower’s ability to repay. Loans that leave people in debt for large percentages of the year do not help the broader community as a whole, and surely we can develop products that fill this need in a more productive way.

Finally, individuals have a role to play in this as well. Individuals must manage their resources responsibly and conduct their affairs ethically so that they can save for emergencies and be willing to provide support to others in need. All too often, shame and embarrassment are why people in need turn to alternatives like auto title loans instead of asking for help from their local church or from their neighbor. As individuals and as Christians, we must do better to ensure that this is not the case. Instead, those in our communities in need should feel comfortable asking for help.

It's clear that the underlying causes of poverty will be not solved by the elimination of predatory lending practices. Predatory lending is a lucrative business and those who want to continue the practice will seek out loopholes and evasions where they can. However, we do have a clear mandate to prevent the exploitation of the poor, vulnerable, and marginalized in our society. Working together, government, businesses, churches, and individuals can attempt to remedy many of the ills associated with predatory vehicle title loans and develop reasonable solutions for the future to uphold public justice and human flourishing in our society.

- Nate Frierson is a recent graduate of Covenant College and currently works at the Center for Public Justice.