While many people have heard of payday lending, fewer are aware of its equally controversial cousin, the car-title loan.
In November 2005, Estelle Williams, 57, wanted a little extra cash to buy Christmas presents. So she went to Instant Cash on High Street, where she borrowed $230 through a "motor vehicle equity line of credit," a/k/a, a "car title loan."
Williams put up her 1994 Nissan Sentra as collateral, leaving Instant Cash with a duplicate set of car keys, a typical arrangement.
Williams, who is on a fixed income, says she made payments of about $60 per month for a year and a half. Williams paid in cash, but since she's able to produce only four relatively recent receipts-- showing payments ranging from $50 to $61-- the total amount she actually paid can't be determined. If she did average $60 per month, however, it would put the amount in the neighborhood of $1,000.
She finally stopped paying in June, she says, because "I wasn't getting anywhere."
Indeed, according to her final payment receipt, dated June 8, 2007, Williams still owed $198.94. In fact, of the $57 payment she made that day, according to the receipt, $56.52 went toward accrued interest, while only 48 cents went toward paying off the principal.
How could someone pay $1,000 on a $230 loan and still owe so much?
Well, it's easy if the interest rate is 240 percent.
Two weeks ago, Instant Cash repossessed her car and, Williams says, told her that by December 10 she had to pony up her current loan balance, now $409, plus a repossession fee of about $100, or the Nissan would be sold.
The Instant Cash loan raises many questions-- but not because of the interest rate. It turns out that these Soprano-like rates are allowed in Virginia-- if the loan is structured correctly.
According to James Speer, director of the Virginia Poverty Law Center, state usury laws, which set 12 percent as the maximum allowed interest rate for loans, have many exceptions. One, used by car-title lenders, applies to open-ended lines of credit, a provision that favors credit card companies.
Williams' loan documents clearly state that her loan has a "maturity date" of December 11, 2005, one month after Instant Cash made the loan. This permits the loan's disclosures to hide the true effect of the 240 percent interest rate. For example, the loan states that "total payments" will be only $276, which would have been true only if Williams had repaid the entire loan within one month.
Speer could not comment on Williams' loan specifically, but he says that with a stated payment date, the loan may have inadvertently fallen under the purview of the usury law. He notes that larger lending companies, which have already litigated this issue a number of times, craft their agreements carefully to avoid such pitfalls.
Speer says he is not familiar with Instant Cash, but speaking generally, he wryly notes that some of the smaller operators "went to scam school and flunked out."
Alex Gulotta of the Legal Aid Justice Center in Charlottesville, agrees. He says it's "common practice [in the state] to disguise loans as open-ended credit to avoid regulatory requirements." His initial review of Williams' loan agreement "raises some questions," he says, but he cautions he would need to talk to Williams and review further documents before rendering an opinion.
If Instant Cash violated usury laws, Williams may have legal remedies.
"John" at Instant Cash says that the manager, Nick Ganakos, is on vacation and unavailable for comment, and John refused to provide any additional information about the company.
"I just answer the phone," he says.
But he apparently dials it as well.
A few hours after I spoke with John, someone from Instant Cash called Williams and offered to return her car and forgive the remainder of the loan in exchange for her loan documents.
"We just wrote it off," to avoid negative publicity, John says in a later call.
To be fair, Williams is partially responsible for her situation. She says she went to Instant Cash because "it seemed easy," was unaware of the loan's high interest rate, and "really didn't think" Instant Cash would take her car if she didn't pay.
Still, a larger question remains. How can the law permit a lending practice that can quickly create such such devastating burdens for members of our community?