Editors' pick: Originally published May 25.
Car title loans have earned both the attention and the ire of the U.S. government, as the Consumer Financial Protection Board rolls out a new report warning consumers of the "harm caused by car title loans." The CFPB describes vehicle title loans as being similar to a high-cost payday loan that is secured by a car title instead of, or sometimes in addition to, direct access to a consumer's bank account.
The consumer watchdog agency says single payment car title loans are "frequently rolled over resulting in a long-term cycle of debt" and notes that "one out of every five borrowers loses their car." This from the agency's report: "Auto title loans, also called vehicle title loans, are high-cost, small-dollar loans borrowers use to cover an emergency or other cash-flow shortage between paychecks or other income. For these loans, borrowers use their vehicle - such as a car, truck, or motorcycle - for collateral and the lender holds their title in exchange for a loan amount. If the loan is repaid, the title is returned to the borrower."
The CFPB report covered auto title loans where a borrower agrees to cover the full amount owed in a lump sum payments plus interest and fees by a certain day. These types of single-payment auto title loans are available in 20 states; in addition, five other states allow only auto title loans repayable in installments.
The CFPB states the typical car title loan stands at $700, and the typical annual percentage rate is about a whopping 300% (by comparison, most 30-year fixed-rate mortgage loan rates clock in at about 4% to 5%). "Our study delivers clear evidence of the dangers auto title loans pose for consumers," said Richard Cordray, director of the CFPB. "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 agency is expected to issue new rules governing the car title loan industry soon, and that's good news for U.S. consumers, financial advocates say.
"The CFPB's proposed rule, scheduled to be released in the coming weeks, is the best chance consumers have at avoiding further harm caused by car title loans and other abusive debt products like payday and car title loans," offers Tom Feltner, director of financial services at Consumer Federation of America. "Getting this rule right means requiring lenders to fully consider a borrower's income and expenses and make a fair determination that, at the end of the month, there is enough money left to pay living expenses and loan payments without hardship or deferring loan payments."
In addition to finding that 20% of consumers who take out a car title loan have their car repossessed, the CFPB also reports that about 80% of all vehicle title loans result in re-borrowing the same day the previous loan is paid off and that only 12% of car title loans are paid off on the original terms. Additionally, over 60% of car title loan borrowers find themselves "stuck" in a loan payment cycle that last seven months, the CFPB states. Financial services industry insiders describe car title loan company lenders as being among the "most predatory" in the U.S.
"Frequently they charge rates of 100% to 180% to poor and uneducated buyers," notes Bruce Ailion, an Atlanta-based real estate agent who's seen the harmful impact such loans among consumers. "It's not surprising 20% lose their car. They often lose more than that amount to get out of this debt. They're defaulting on home loans and rents, and they're selling family heirlooms to keep a car they need to keep a job to feed themselves and their family."
The problem, Ailion says, is that the car title loan model is a highly profitable one for industry companies. "These lenders frequently loan a fraction of the asset value and are fully secured," he says. "Borrowers enter a cycle of refinancing to pay the previous balance. Years ago, this would be called loan sharking and be conducted by criminal enterprises. What is particularly distressing is these firms often borrow from the big money center banks at 4% to 5% and then lend out at 100% to 180%."
"This kind of lending prays upon the least fortunate among us and is shameful," Ailion adds.
Of course, the industry does have its defenders. "Car title lenders can be legitimate, depending on the state the loan provider operates in, title lending is either completely legal with few restrictions, or it will be legal with some major restrictions," says Katie Smith, who formerly worked for TMX Finance, one of the nation's largest title lenders. "The 'legitimacy' of the loans often comes into question based on how a lender will skirt restrictions, and really, they all do try to skirt the restrictions to maximize their returns."
"Oftentimes, a state will legislate that lenders have a cap on the APR for the loan," she adds. This is certainly the case in Florida, for example, Smith explained. Florida lenders will add on ancillary products, such as insurance, warranties and even car clubs to boost their returns. Such add-on services can spike a patron's monthly payment up pretty high; the insurance services often can come in at about $100/month. While the lenders cannot mandate the patrons sign up for these add-on services, they certain do encourage them to add them on. Smith describes auto title loans as both "helpful and harmful."
"They can be both to the same individuals," Smith adds. "Most people seeking title loans do not have access to traditional lenders due to poor credit or immediacy of their financial needs."
A large percentage of those seeking loans also do not have a firm understanding of concepts like APR, or knowledge of how credit and debt work in a complex banking system. The title lenders are definitely catering to "the under-served" - people without credit cards, often people without bank accounts. To these people, the title loan can feel like a real "life line" when they are faced with a large bill (such as rent or medical expenses), or as a means to providing a more comfortable life in the immediate future (such as being able to provide a large meal and copious presents on Christmas day to their families). If a patron seeks a title loan and repays it in a short period of time (say less than three months), his situation can improve at relatively little interest cost.
But its Ailion and Feltner who seem to have the prevailing, negative attitude toward car title loan operators. Now, those operators find themselves standing under the same spotlight as pay day loan lenders, as the industry tries to make its case against a highly skeptical, and powerful, U.S. government agency.