The Consumer Financial Protection Bureau (CFPB) is shining a harsh light on car title loans -- the high-cost, small-dollar loans consumers use to cover unexpected expenses.
A CFPB study being released today finds that one in five borrowers who take out a title loan wind up having their car or truck seized by the lender. More than four in five of the loans are renewed on the day they're due and two-thirds of car title loans are made to borrowers who end up taking out seven or more consecutive loans.
“Our study delivers clear evidence of the dangers auto title loans pose for consumers,” said CFPB Director Richard Cordray. “Instead of repaying their loan with a single payment when it is due, most borrowers wind up mired in debt for most of the year. The collateral damage can be especially severe for borrowers who have their car or truck seized, costing them ready access to their job or the doctor’s office.”
Car title loans are similar to payday loans except the borrower puts up their car, truck or motorcycle as collateral. The lender holds the title as security; if the loan is repaired then the title is returned, but if it isn't then the consumer loses his vehicle and all the money he has invested in it.
The typical loan is about $700 and the typical annual percentage rate is about 300 percent, far higher than most forms of credit, the study found. For the auto title loans covered in the CFPB report, a borrower agrees to pay the full amount owed in a lump sum plus interest and fees by a certain day. These single-payment auto title loans are available in 20 states; five other states allow only auto title loans repayable in installments.
Similar to payday loans
The study looked at nearly 3.5 million car title loans and found them presenting issues similar to payday loans, including high rates of consumer reborrowing, which can create long-term debt traps.
A borrower who cannot repay the initial loan by the due date must re-borrow or risk losing their vehicle. Such reborrowing can trigger high costs in fees and interest and other collateral damage to a consumer’s life and finances.
Today's report follows an earlier study on online payday loans which found that borrowers get hit with steep bank penalties and risk losing their checking account due to repeated attempts by their lender to debit payments. With auto title loans, consumers risk their car or truck and a resulting loss of mobility, or becoming swamped in a cycle of debt.
The CFPB says it is considering proposals to put an end to payday debt traps by requiring lenders to take steps to determine whether borrowers can repay their loan and still meet other financial obligations.