Cash-strapped consumers are being pushed into expensive, high-risk loans, using their automobiles as collateral, according to a new report by the Consumer Federation of America. CFA says car title lenders charge consumers 300 percent annual interest for small cash loans secured by the title to cars owned free and clear.
Loans are for a fraction of the cars value, but failure to pay in full at the end of the month can lead to late-night repossessions by lenders holding a duplicate set of keys.
Title loans trap borrowers in perpetual debt through unaffordable balloon payments, high interest costs, and the threat of repossession, said Jean Ann Fox, director of consumer protection for Consumer Federation of America.
Title loans for up to half the value of the consumers car cost ten times more than it would to get an auto loan to finance the purchase of the same car.
CFA said a survey of title lenders in eleven states and online found almost half of the states permit predatory title lending, either through weak authorizing laws or failure to close consumer loan loopholes.
In California and South Carolina, lenders only make loans that are large enough not to trigger rate caps. In Virginia, Iowa and Kansas, lenders claim their loans are open-ended to get around state limits for small loans.
The industry is reportedly pushing for state laws to legalize title loans without rate caps or adequate protections.
CFAs study, Driven into Debt: CFA Car Title Loan Store and Online Survey, documents that lax state laws result in the most abusive loans. Tennessee and Mississippi permit loans up to $2,500 to be due in thirty days. Georgia permits title lenders to keep all the proceeds earned from selling a repossessed car. Online lenders are entering the title loan market, claiming to use the lax regulatory environment in New Mexico or Delaware to market loans nationwide.
Title loans are extremely expensive. Title loan stores charge a median 25% per month finance charge which translates to 300% annual interest, plus additional fees average $25 per loan.
CFA urges states to close loopholes being exploited by title lenders and to reject industry-backed model legislation to legitimize predatory title loans, Fox said. States that fail to protect their consumers from one-sided title loans should repeal or reform their laws, as Kentucky and Florida recently did.