Using a vehicle as collateral for a short-term, high-interest loan leads to repossession for one in five consumers, report shows
May 19, 2016
One-in-five borrowers who take out a single-payment auto title loan have their car or truck seized by their lender for failing to repay their debt, according to the Consumer Financial Protection Bureau.
More than four-in-five of these loans are renewed the day they’re due because borrowers can’t afford to repay them with a single payment, the bureau’s study shows. More than two-thirds of auto title loan business comes from borrowers who wind up taking out seven or more consecutive loans and are stuck in debt for most of the year.
“Our study delivers clear evidence of the dangers auto title loans pose for consumers,” said Richard Cordray, director of the bureau. “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.”
Auto title loans are high-cost, small loans borrowers use to cover an emergency or other cash-flow shortage between paychecks or other income. For these loans, borrowers use their vehicle 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 typical loan is about $700, and the typical annual percentage rate is about 300 percent, far higher than most other types of credit.
For the auto title loans covered in the bureau report, a borrower agrees to pay the full amount owed in a lump sum plus interest and fees by a certain day. These single-payment auto title loans are available in 20 states; five other states allow only auto title loans repayable in installments.
The bureau’s report looked at nearly 3.5 million single-payment auto title loan records from nonbank lenders from 2010 through 2013. It follows bureau studies of payday loans and deposit advance products.
The bureau study found that auto title loans often have issues similar to payday loans, including high rates of consumer reborrowing, which can create long-term debt traps. A borrower who can’t repay the initial loan by the due date must re-borrow or risk losing his or her vehicle. Such reborrowing can trigger high costs in fees and interest and other collateral damage to a consumer’s life and finances.
The study also found that:
- More than half of auto title loans become long-term debt burdens.
- Borrowers stuck in debt for seven months or more supply two-thirds of title loan business.
With auto title loans, consumers risk their car or truck and their method of transportation or becoming swamped in a cycle of debt.
The bureau is considering proposals to put an end to payday debt traps by requiring lenders to take steps to determine whether borrowers can repay their loan and still meet other financial obligations, Cordray said.
Comments