Are auto title loans predatory? A federal study raises concerns.
A report released Wednesday by the federal Consumer Financial Protection Bureau found high rates of vehicle repossession and long-lasting debt within the auto title lending industry.
Auto title loans are meant to provide borrowers with short-term access to cash when they need it most. But the CFPB found that for many consumers, loans quickly snowball into long-term debt. The report raises questions about the state of current lending practices and could spur additional federal regulation.
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 title to the borrower’s vehicle until the loan is paid off and charge a annual percentage rate of approximately 300 percent, according to the report. If a loan cannot be repaid in full, borrowers are forced to renew the loan and often pay associated fees.
Only 20 US states currently require auto title loans to be paid in full at the end of the initial term, while five others allow structured payment plans.
The bureau’s study of 3.5 million loans from 2010 to 2013 showed that one in five borrowers with a one-time payment car title loan ends up having their vehicle owned by lenders, and about half of these loans end up becoming long-term debt obligations with borrowers frequently. take out four or more loans to repay their original loans. Eighty percent of auto title loans are not repaid in full in one payment.
The CFPB also found that about two-thirds of the securities lending industry is backed by borrowers stuck in a debt cycle for seven months or more.
“Our study gives clear evidence of the dangers auto title lending poses to consumers,” CFPB Director Richard Cordray said in a statement. “Instead of repaying their loan in one installment when due, most borrowers find themselves in debt for most of the year.”
Mr Cordray added that borrowers may be more affected by repossession as it can block their access to work or other services.
Automatic title loans work the same way as short-term payday loans, which have also proven be problematic for borrowers; According to The Pew Charitable Trusts, online payday loans averaged an APR of 650% and led nine out of 10 borrowers to file complaints with the Better Business Bureau about their lenders. Last week, Google announced it would ban ads on its services for such loans.
The auto title lending industry rose to prominence after states began capping payday loan interest rate levels over the past decade. Lenders have continued this practice by moving their collateral from the money to the vehicles, and auto title lending currently attracts 2 million Americans in need of short-term loans each year. Pew also found that about 5 million Americans take out payday loans each year.
Associated Press material was used in this report.