In current auto news, predatory lending, depicted here as a blue toy car in a bear trap.

Title Lender That Charges 300% Annual Interest Given Federal Pandemic Loan With 3% Interest

I have a riddle for you: a middle-class American worker and a massive, multi-state corporation both apply for a loan. The worker puts up his beloved Ford F-150, which he worked hard to buy, as collateral, while the corporation makes no such offer. One of them receives a $25 million loan while the other receives a small loan for $1,200; one of these loans has 300% annual interest on it, while the other has just 3% interest. Now here’s the riddle: which one receives which loan and interest rate?

If you answered that the middle-class worker received a $1,200 loan with 3% interest on it, then you’re half right – you can get that loan, but you could be looking at 300% at an annual rate. At least if you get it from a car title loan business like LoanStar in Texas. I’m sorry, they’re not a car title loan business; they’re categorized as a “credit access business.” That’s why their parent company, Wellshire Financial Services, was able to recently receive a $25 million loan from the Federal government with such tiny interest on it. Sound absurd? I agree, so let’s take a look at what happened and how this all played out, so the next time you wonder if maybe the game is rigged, you’ll have a clearer answer.

LoanStar and Wellshire Financial Services

What I’m talking about today is a company called Wellshire Financial Services, a massive corporation that spans numerous states and runs a number of businesses under its umbrella. One of the states it thrives in is Texas, and among the businesses it operates are lenders such as LoanStar and Moneymax. If you live in Texas, then you’ve most likely heard of LoanStar, and you know what they do.

Recently, Wellshire Financial Services received a $25 million loan from our Federal government as part of the Main Street Lending program, which had an overall budget of $600 billion. This program was, we were told, meant to help small and medium-sized businesses, and yet we’re clearly not talking about a mom-and-pop store or a small local car dealership. We’re not looking at a company with a dozen employees that needed some money to help with payroll and rent during pandemic closures. This is a massive company that, one would hope, should have more funding to rely on.

Perhaps the most confusing part of this, however, is that the Main Street Lending program was specifically not available to companies that are primarily engaged in lending for their primary function. Businesses that simply exist to lend money to people, at exorbitant interest rates, were not allowed to receive funds from this program. And yet Wellshire Financial Serviced did just that, and according to the lender that approved them, that’s completely fine. Why? Well…

A man is in anguish while reading a piece of paper in front of a laptop.

Car Title Loans vs Credit Access Businesses

That’s because Texas has created a really neat loophole for these kinds of companies to no longer be considered businesses that are primarily involved in lending. In order for this to make sense (or at least as much sense as it can make), we have to look at what these companies do and how they are categorized in Texas. In this case, the fact that they are in Texas specifically is important, and that’s why I keep mentioning it.

So, in case you don’t know, the basic idea behind a car title loan operation is that they will lend private individuals money using that person’s vehicle title as collateral. If that sounds like a payday loan with extra steps, that’s because that is pretty much exactly what it is. Someone finds themselves coming up short on paying rent or another important bill, and they can go to a car title loan business and get a loan pretty easily. All they do is use their car title as collateral, which means that if they cannot repay the loan, their vehicle can be taken by the lender.

Now, awhile back, Texas created a new category for companies: credit access business. When this was first set up, the idea was that it would apply to businesses that help people repair their credit and get back on top of things. Companies that lend people money to help them pay off their other debts, so they get everything under a single payment. These credit access businesses were even capped at a 10% interest on their consumer finance loans so that they couldn’t take advantage of people in a bad situation.

The problem? Auto title loan businesses realized they could reframe what they do and call themselves credit access businesses. How do they do this? Well, technically, they don’t actually give their customers a loan. What they do is connect their borrowers to a “third-party” that lends the person money, and all they do is apply their own “fees” to this loan. So the lender is restricted by that 10% cap on interest under Texas regulations, but companies like LoanStar are free to charge whatever they want as fees on the loan.

A tow truck driver is repossessing a blue car and securing straps on the flatbed.

3% Interest vs 350% Interest

That’s how we get to exorbitant interest. If you go to LoanStar and take out a loan of $1,200, you’ll have to give your vehicle’s title as collateral for that loan. Assuming you can pay it back in a month, you’ll pay about $12 in interest to the actual lender, whoever that is, while LoanStar charges you more than $350 in fees on the loan. So while it’s not called interest on any piece of paper, what you’re really paying is more than 300% at an annual rate.

And if you can’t make your payments, LoanStar is officially the guarantor on the loan from the third-party. So if you default on it, LoanStar takes over collections of the loan, at which point they can take your car or truck. It’s quite the racket. I’d actually be impressed if it wasn’t downright evil.

So, back to that $25 million that LoanStar’s daddy, Wellshire Financial, received from the Federal government. I’ve already spoiled the punchline for you, but I’m going to say it anyway: they received that loan with a 3% interest rate on it. In fact, the terms on the loan are so good they don’t even have to pay on the principal (the actual $25 million) for two years, with no interest payments for a full year. Meanwhile, a human person, on the verge of losing their home, needing to buy groceries, or keep the lights on, is looking at grotesque interest with payment due in one month.

Why Should You Care?

I know you just came here to read about auto news, not have to read about politics or the evils of late-stage capitalism. I get that, I do. But this stuff is going on every day, and they’re not even hiding it. It’s out in the public for everyone to see because they feel like they’re beyond the point of repercussions.

They’re wrong. All it takes is for people like you to care about this and realize that it IS auto news. We’re talking about car title loans here – vicious, exorbitant loans that can result in someone losing the car, truck, or SUV that they worked hard for. We can change this kind of stuff; we can make sure the folks in charge of it know that it’s not okay. No one should have to decide between keeping their vehicle and keeping a roof over their head.