About one in five drivers who take out a title loan ultimately have their vehicle seized by the lender, federal regulators said Tuesday when issuing a report on the high-cost, short-term lending practice.
Title loans are similar to payday loans, but are secured by a car or truck, meaning the borrower risks losing her vehicle if she falls behind. More than four out of five borrowers fail to pay off the loan in the initial borrowing period, and two-thirds renew the loan at least seven times, according to the Consumer Financial Protection Bureau. A high percentage of those who renew repeatedly ultimately lose their cars and trucks, the CFPB warned.
Nationwide, the title loan industry is roughly the same size as the payday loan industry, amassing $3.9 billion in fees each year from consumers, according to the Center for Responsible Lending. However, in some states, the title business far exceeds the payday business. In Mississippi, for example, title loans brought lenders $297 million in fees, compared with $230 million for payday loans. In Alabama, title loans totaled $357 million, compared with $125 million. Both states are in the top six for short-term loan fee volume, along with Ohio, California, Illinois and Texas.
The median car title loan is about $700, and the average is $959 — larger than payday loans since it's based on the value of the collateral. The typical annual percentage rate is about 300%, the CFPB says. While the loans are advertised as one-time stopgaps for strapped consumers to pay bills, only 12% of borrowers manage to be "one-and-done – paying back their loan, fees and interest with a single payment without quickly reborrowing," the CFPB said.
"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."
The report examined nearly 3.5 million title loans made to 400,000 borrowers from 2010 through 2013.
The CFPB is preparing new rules to govern the short-term lending industry and has issued numerous studies. Most recently, they reported online payday borrowers frequently end up losing access to checking accounts when they fail to make payments. The new short-term loan rules are expected to be released later this year.
Here are more detailed findings from the CFPB:
- One in five borrowers have their vehicle seized by the lender: Single-payment auto title loans have a high rate of default, and one in five borrowers have their car or truck seized or repossessed for failure to repay. This may occur if they cannot repay the loan either with a single payment or after taking out repeated loans. Worse still, it may compromise the consumer's ability to get to work or the doctor.
- Four in five auto title loans are not repaid with a single payment: Auto title loans are marketed as single-payment loans, but most borrowers take out more loans to repay the initial debt. More than four in five auto title loans are renewed the day they're due because borrowers cannot afford to pay them off with a single payment. In only about 12% of cases do borrowers manage to be one-and-done, that is, to pay back their loan, fees and interest with a single payment and not quickly reborrow.
- More than half of auto title loans become long-term debt burdens: In more than half of these instances, borrowers take out four or more consecutive loans. This repeated borrowing quickly adds fees and interest to the original debt. What starts as a short-term, emergency loan becomes a long-term debt load for a consumer who's already struggling
- Borrowers stuck in debt for seven months or more supply two-thirds of title loan business: Single-payment title lenders rely on borrowers taking out repeated loans to generate high-fee income. In fact, more than two-thirds of the title loan business is comprised of consumers who reborrow six or more times. In contrast, loans paid in full with a single payment make up less than 20% of a lender's overall business.
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