Right when we thought payday loans were just about the worst way for Americans to get cash in a pinch, title loans are giving them a run for their money.
An estimated 2.5 million Americans take out title loans each year, generating $3 billion in revenue for lenders, according to a new report by the The Pew Charitable Trusts. That may sound like small potatoes compared to payday lenders as a whole — an industry that generates $9 billion in revenue each year, says Pew — but title loans have the potential to be far more damaging to the consumers who use them.
Here’s how auto title loans work: A cash-strapped borrower uses their car as collateral for a short-term loan, typically 30 days. The loan amount depends on the value of the car, which is determined by the lender’s own on-site appraisal. According to Pew, the average title loan amount is $1,000. Loans are typically either paid back in a lump sum “balloon” payment or in installments.
Much like payday lenders, car title lenders make their money by charging onerous fees — a typical title loan comes with a $250 upfront fee and loans have to be repaid in full within 30 days. If borrowers can’t come up with the cash, they either sacrifice their car, or they can pay another $250 to get their loan extended. And so a vicious cycle begins. According to Pew, the average title loan borrower will wind up paying $1,200 in additional fees on a loan that was originally $1,000.
But title loans pose an even greater risk to borrowers than payday loans for two primary reasons: They’re easier to qualify for and they can be taken out in much larger amounts.
Most payday lenders require borrowers to have proof of employment and ownership of a checking account. Title lenders only require borrowers to own a car.
Payday loans are generally smaller, too, averaging $375 or 36% of the typical borrower’s monthly income. Title loans can be taken out for three times that amount and represent more than 50% of the typical borrower’s monthly income, according to Pew.
To keep tabs on borrowers’ wheels, some lenders have taken to outfitting cars with GPS tracking devices that give them the ability to remotely lock cars when their owners miss payments. Lenders can technically repossess cars after just one missed payment, but they may choose not to — it’s more lucrative to simply convince borrowers to keep extending their loans. Some states require lenders that repossess and later sell cars to pay the owner the difference between the sale price and the loan amount, according to the Federal Trade Commission.
“The problems with title loans are very much like the problems in the payday lending space,” says Nick Bourke, director of Pew’s small-dollar loans project. “The difference is that title loans carry even higher costs than payday loans and borrowers face the additional risk of losing an asset—their car—that for some is their main form of transportation.
The solution for predatory payday lending is simple, Bourke says. Pew, as well as other consumer advocacy groups, has asked regulators to put caps on the fees title lenders can charge and require lenders to market their loans for what they actually are — high-interest installment loans that will take months to repay, not weeks.
“Title loans often look like something that’s better than what it really is,” he says.
Reform could soon be on its way. Since last spring, the Consumer Financial Protection Bureau has been working on a set of rules that could, for the first time, impose nationwide regulations on the payday lending industry as a whole. Some states have taken it upon themselves already to cripple payday lenders by imposing super low caps on the fees they can charge. In states like New York, where fees are capped at 25%, payday lending has practically gone extinct. The CFPB hasn’t yet targeted title loan operators specifically, but chances are they are next on their list.
Correction: an earlier version of this article incorrectly stated that the report came from Pew Research Center. It is a report by Pew Charitable Trusts.
Have you ever taken out a title loan? Share your story with us: firstname.lastname@example.org.
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