Are auto title loans predatory? Federal study raises concerns.
A study from the Consumer Financial Protection Bureau shows that the auto title lending industry often locks borrowers into longterm debt cycles.
A report released Wednesday by the federal Consumer Financial Protection Bureau found high rates of vehicle repossession and lasting debt within the auto title lending industry.
Auto title loans are supposed to offer borrowers short term access to cash when they need it most. But the CFPB found that for many consumers, the loans quickly snowball into longterm debt. The report raises questions about the state of current loan practices and could spur additional federal regulations.
Title loans allow borrowers to use their vehicles as collateral to borrow what are usually small amounts of money – an average of $700. Lenders hold a borrower’s vehicle title until the loan is repaid, and charge an annual percentage rate of around 300 percent, the report found. If a loan cannot be repaid in full, borrowers are forced to renew the loan and often pay an associated fee.
Only 20 US states currently require full payment of auto title loans at the end of the original term, while five others allow for structured payment plans.
The bureau’s study of 3.5 million loans from 2010 to 2013 showed one in five borrowers with a single-payment auto title loan ends up having his or her vehicle possessed by lenders, and around half of such loans end up becoming longterm debt obligation with borrowers frequently taking out four or more loans to repay their initial loans. Eighty percent of auto title loans are not repaid in full in a single payment.
The CFPB also found that around two-thirds of the title loan industry is supported by borrowers stuck in a debt cycle for seven or more months.
“Our study delivers clear evidence of the dangers auto title loans pose for consumers,” CFPB Director Richard Cordray said in a release. “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.”
Mr. Cordray added that borrowers can be further affected by repossession as it can block their access to work or other services.
Auto title loans function similarly to short-term payday loans, which have also been found to be problematic for borrowers; online payday loans were found to average a 650 percent APR by The Pew Charitable Trusts and resulted in nine out of 10 borrowers filing complaints to the Better Business Bureau regarding their lenders. This past week, Google announced it would ban advertisements on its services for such loans.
The auto title lending industry rose to prominence after states began limiting payday loan interest rate levels over the past decade. Lenders kept up the practice by shifting their collateral from money to vehicles, and auto title lending currently annually attracts 2 million Americans in need of short-term loans. Pew also found that around 5 million Americans take out payday loans each year.
Material from The Associated Press was used in this report.