More than 2 million Americans annually use auto title loans, in which they borrow against the value of their cars, with the title used as collateral. This report incorporates results from the first nationally representative telephone survey of this market, a series of focus groups with borrowers, and an examination of regulatory data and company filings to illuminate lender practices, borrower experiences, and common problems in the auto title loan market.
The study finds that title loans are plagued by the same issues found in the payday loan market, particularly unnecessarily high prices and unaffordable payments that lead to extended indebtedness. But title loan borrowers face the additional risk of losing an asset—a car—that, for some, is their primary form of transportation. On average, the larger loan sizes in the title loan market also lead borrowers to spend more than double the amount that payday loan borrowers do annually. Pew has issued policy recommendations that address these issues. By implementing these recommendations, the Consumer Financial Protection Bureau and state policymakers can alleviate the harms identified in this research.
Auto title loan customers spend about $1,200 in fees each per year for loans that average $1,000.
Title loan customers pay a total of about $3 billion in fees annually. The typical annual percentage rate for an auto title loan is 300 percent.
On average, lump-sum title loan payments consume 50 percent of a typical borrower’s gross monthly income.
That’s far more than most borrowers can afford. By contrast, a typical payday loan payment takes 36 percent of a typical borrower’s paycheck.
Between 6 and 11 percent of title loan borrowers have a car repossessed annually.
One-third of all title loan borrowers do not have another working vehicle in their households.
Only one-quarter of title loan borrowers use the loans for an unexpected expense.
Half of borrowers report using title loans to pay regular bills. More than 9 in 10 title loans are taken out for personal reasons, compared with just 3 percent for a business owned by the borrower.
Title loan borrowers believe the industry should be more regulated.
Borrowers overwhelmingly favor regulation mandating that they be allowed to repay the loans in affordable installments.
Pew’s analysis shows that the title loan and payday loan markets share many similarities. The typical borrower for both products is a low-income worker who routinely struggles to pay ordinary living expenses and who usually renews or re-borrows the loan to make ends meet. The same fundamental problems afflict both markets: unaffordable lump-sum payments, unrealistically short repayment periods, and unnecessarily high prices. Therefore, Pew renews its call to policymakers to enact policies to cover all small-dollar cash loans, including storefront and online payday loans, auto title loans, and consumer installment loans from banks and nonbanks.
State policymakers may choose to eliminate high-cost auto title and payday loans altogether or to fundamentally reform them to be safer and more affordable.
The Consumer Financial Protection Bureau does not have the authority to regulate interest rates, but it can and should establish certain important safeguards and require small-dollar loans to have manageable installment payments. Pew’s small-dollar loan policy recommendations can reduce the cost of title loans and improve the affordability of payments while maintaining consumer access to credit. The recommendations are as follows:
- Ensure that the borrower has the ability to repay the loan as structured.
- Spread loan costs evenly over the life of the loan.
- Guard against harmful repayment or collections practices.
- Require concise, accurate disclosures of periodic and total costs.
- Continue to set maximum allowable charges.