It makes me sad and angry to read, “Back in 2007, the couple took a $500 car-title loan that mushroomed into a $3,000 headache”, in a news story about car-title loans. Clearly, there’s something morally wrong here. Ethical lenders don’t lend money to people whom are clearly unable to pay it back. But these car-title lenders not only lend money to people who can’t pay it back, they count on profiting when the borrowers are unable to repay. That’s when the lenders pile on the fees and the loan gets rolled over into a new loan. The story of a $500 loan growing into a $3,000 debt is only one of thousands of such stories. Many of these loans grow much larger.
We could discuss what the couple should have done (work more, spend less, beg or borrow from family and friends instead of going to the car-title loan place). Or we could discuss what kind of laws might help protect people from this sort of lending (limits on interest rates or fees? mandate that all loans must allow repayment in some large number of monthly payments?).
But what I want to say most is simply this: Debt can be an awful, evil, horrible thing and must be used with extreme care and caution and avoided as much as possible. Compound interest either works for you, or it works against you — and the higher the rate, the harder it works. The interest on credit card debt can be financially debilitating … and the interest on car-title loans can be several times higher.
If you are unable to borrow a small amount like $500* by just filling out a couple forms and signing on the dotted line (without putting up your car or any other valuable property as collateral), then you shouldn’t be borrowing money at all. The system is telling you that you are not a good borrower. You are not a good risk. If you proceed you will be treated accordingly.
“The rich rule over the poor, and the borrower is slave to the lender.”
— Proverbs 22:7
* However, you probably wouldn’t need to borrow $500 if you consistently live below you means, have an emergency fund and money in the bank.
