WASHINGTON—Automobile title loans present many of the same problems as payday loans, including unaffordable balloon payments that lead to repeat borrowing, according to a new report released today by The Pew Charitable Trusts. The burden these loans impose on borrowers reinforces the need for the Consumer Financial Protection Bureau (CFPB) and state policymakers to make high-priced, small-dollar loans safer and more affordable.
More than 2 million Americans use auto title loans annually, borrowing from storefront lenders against the value of their cars with their auto titles as collateral. Borrowers are required to repay the principal plus a fee within a specified time period, typically about a month, and the lender has the right to repossess the car if the loan is not repaid.
To gain a better understanding of this market, Pew conducted the first nationally representative telephone survey of title loan borrowers as well as a series of focus groups with borrowers. Pew also examined state regulatory data and company filings to illuminate practices, experiences, and problems in the title loan market.
“We found that auto title loans share the same harmful characteristics as payday loans,” said Nick Bourke, director of Pew’s small-dollar loans project. “They require balloon payments that borrowers can’t afford, and most customers end up having to re-borrow the loans repeatedly.
“The difference is that title loans carry even higher costs than payday loans,” said Bourke, “and borrowers face the additional risk of losing an asset—their car—that for some is their main form of transportation.”
Pew’s report, Auto Title Loans: Market Practices and Borrowers’ Experiences, found:
- Title loan customers spend approximately $3 billion annually, or about $1,200 each, in fees for loans that average $1,000. The annual interest rates for title loans are typically 300 percent annual percentage rate (APR), but lenders charge less in states that require lower rates.
- The average lump-sum title loan payment consumes 50 percent of an average borrower’s gross monthly income, far more than most borrowers can afford. By comparison, a typical payday loan payment takes 36 percent of the borrower’s paycheck.
- Between 6 and 11 percent of title loan customers 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 borrowers use title loans for an unexpected expense; half report using them to pay regular bills. More than 9 in 10 title loans are taken out for personal reasons; just 3 percent are for a business the borrower owns or operates.
- Title loan borrowers overwhelmingly favor regulation mandating that they be allowed to repay the loans in affordable installments.
The striking parallels that Pew found between auto title and payday loans—in terms of high cost, business models, and who uses them and why—are underscored by the fact that about half of title loan branches also offer payday loans. Auto title lenders operate in 25 states: Alabama, Arizona, California, Delaware, Florida, Georgia, Idaho, Illinois, Kansas, Louisiana, Minnesota, Mississippi, Missouri, Nevada, New Hampshire, New Mexico, Ohio, Oregon, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, and Wisconsin. The remaining states and the District of Columbia prohibit high-interest auto title loans, and Pew recommends that they continue to do so.
The report urges policymakers to adopt Pew’s policy recommendations and either prohibit high-interest, small-dollar loans or make them more transparent, affordable, and safe through key reforms:
- Ensure the borrower has the ability to repay the loan as structured.
- Spread costs evenly over the life of the loan.
- Guard against harmful repayment and collections practices.
- Require concise disclosures.
- Set maximum allowable charges.
The CFPB is currently developing rules to address the problems associated with payday lending. Because the auto title loan market is affected by the same problems found in the payday loan market, Pew recommends that the CFPB include auto title loans under these new rules.
The Pew Charitable Trusts is driven by the power of knowledge to solve today’s most challenging problems. Learn more at www.pewtrusts.org.