NEW YORK, N.Y. – People who put their cars up as collateral for what are supposed to be short-term emergency loans are being hit with interest rates of 300 per cent, a high rate of repossession and long repayment periods.
That’s according to a study by the Consumer Financial Protection Bureau released Wednesday. The report is the first by federal regulators to look at the auto title lending industry, which has grown significantly since the recession but remains banned in half the country. The results could lead to additional regulations on the industry, like its financial cousin payday loans.
The CFPB’s study found that the typical auto title loan was about $700 with an annual percentage rate of 300 per cent. Like payday loans, borrowers have a high likelihood of renewing the loan instead of paying it off.
“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,” said CFPB Director Richard Cordray in prepared remarks.
Worse, one out of every five auto title loans made results in the borrower’s car being repossessed, according to the study. The CFPB’s results were worse than data compiled by the Pew Charitable Trusts, which showed 6 to 11 per cent of all auto title loans result in repossession.
Auto title loans are similar to payday loans, where a customer needs to borrow money for a short period of time, usually a month. Unlike a payday loan, however, borrowers are required to put up the title to their car as collateral. The loans are typically made to people with poor credit but own their car outright. Like a payday loan, an auto title loan must be repaid in full at the due date or the loan must be renewed and a fee paid.
Borrowers unable to pay the loan will lose the title to their car, which critics say often has the secondary effect of damaging a person’s ability to get to work.
“The collateral damage can be severe,” Cordray said, in a call with reporters.
Auto title loans grew in usage after many state legislatures capped the interest rate on payday loans. To skirt around new regulations, several payday lenders rebranded or reconfigured themselves as auto title lenders in order to keep making high-cost loans. In one notorious example, Arizona voters effectively banned payday lending in 2008 but, due to a legal loophole, hundreds of payday lenders took out licenses to become auto title lenders.
Twenty states allow for auto title loans that must be repaid in full when due and another five states allow auto title loans that require a pay-over-time structure. Most of the states are located in the West and South. Some companies who do title loans include Georgia-based TitleMax or California-based LoanMart.
Approximately 2 million Americans take out an auto title loan each year, compared with the 5 million Americans who took out a payday loan, according to research done in 2015 by the Pew Charitable Trusts.
The CFPB has often used its commissioned studies a first step to start regulating an industry or practice. The proposed regulations to limit arbitration agreements in financial services and rules being written about payday loans all started with CFPB studies.
CFPB officials said that new regulations on auto title loans are being considered as part of the bureau’s upcoming rules for payday lenders.