More than 2 million people, approximately 1 percent of American adults, use high-interest automobile title loans annually, borrowing against their cars.1 A lender, after inspecting a car brought in by a prospective borrower, makes a loan based on a portion of the vehicle’s value and keeps the title as collateral while the customer continues using the car.2 The borrower usually must repay the principal plus a fee in a single balloon payment, typically after one month, and the lender has the right to repossess the car if the loan is not repaid.3
Over 8,000 title loan stores operate in the 25 states where this type of loan is available.4 States have differing limits on loan sizes, fees, and durations, resulting in large cross-state variation in the loans’ costs for borrowers.5 Title loans are less widely used than payday loans and are usually made for larger amounts, but the two products are similar in structure, cost, and business model. The typical customer for both is a low-income worker who is struggling to make ends meet.6 These parallels are underscored by the fact that about half of title loan branches also offer payday loans.7
Most title loans are structured as balloon-payment, also known as lump-sum payment, loans, as described above; some states also allow or require title loans to be repayable in installments.8 When the loan comes due, borrowers who cannot afford to repay can renew it for a fee. As with payday loans, payments exceed most title loan borrowers’ ability to repay—so the large majority of loans in this market are renewals, rather than new extensions of credit.9
One key reason title loans are so expensive is that, as in the payday loan market, borrowers do not primarily shop based on price, and so lenders do not lower prices to attract customers.10 Instead, lenders tend to compete most on location, convenience, and customer service. In states that limit the fees lenders can charge for payday loans, lenders operate fewer stores—with each serving more customers—and credit remains widely available.11 Similar access to title loans could be maintained at prices substantially lower than those in the market today.12
The research base on title loans is far smaller than that on similar subprime small-dollar credit products, such as payday loans.13 To begin filling this gap, The Pew Charitable Trusts conducted the first nationally representative telephone survey of borrowers, a series of focus groups, and an examination of state regulatory data and company filings to illuminate practices, experiences, and problems in the title loan market. (See Appendix C.) Unless otherwise noted, information about market trends and legal requirements is based on Pew’s analysis of lenders’ practices, market trends, and applicable laws. The analysis found that:
- Title loan customers spend approximately $3 billion annually, or about $1,200 each, in fees for loans that average $1,000.14 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.15
- 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.16 By comparison, a typical payday loan payment takes 36 percent of the borrower’s paycheck.17
- 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.
This report details these findings, and shows that the title loan market has many similarities with the payday loan market as well as several important differences, such as larger loan sizes and the risk to borrowers of losing a vehicle. Overall, the research demonstrates that the title loan market suffers from the same fundamental problems as the payday loan market, including unaffordable balloon payments, unrealistically short repayment periods, and unnecessarily high prices.
Pew urges state and federal policymakers to address these problems. They may elect to prohibit high-cost loans altogether (as some states have done), or issue new, more uniform regulations that would fundamentally reform the market for payday and title loans by:
- Ensuring that the borrower has the ability to repay the loan as structured.
- Spreading costs evenly over the life of the loan.
- Guarding against harmful repayment and collections practices.
- Requiring concise disclosures.
- Setting maximum allowable charges.
In particular, as the federal regulator for the auto title loan market, the Consumer Financial Protection Bureau should act urgently to alleviate the harms identified in this research. Although the bureau lacks the authority to regulate interest rates, it has the power to codify important structural reforms into federal law.
- The estimate of 1 percent of American adults using title loans each year is calculated three ways, drawing on data available from state
regulatory reports and industry filings:
- The share of adults who use title loans in states that allow them (an average of 1.6 percent, based on the three states that report the number of individual borrowers: Illinois, Texas, and Virginia, which represent approximately 40 percent of the national market by store count) multiplied by the adult population of those states (148 million), yielding 2.4 million.
- The number of title loan stores (8,138, see endnote 4) multiplied by the number of borrowers per store (300, based on industry filings and state regulatory data) (estimate of 2.4 million).
- TMX Finance’s customer count (470,000), divided by its share of stores (13.4 percent at the end of 2012), divided by the ratio of its borrowers per store (454) to the average number of borrowers per store (300), yields a similar 2.3 million borrowers.
- ACE Cash Express, “Frequently Asked Questions,” 2014, accessed Aug. 29, 2014, https://www.acecashexpress.com/title-loans/ faq; and Todd J. Zywicki, “Consumer Use and Government Regulation of Title Pledge Lending,” George Mason University School of Law Mercatus Center (2010), 13, accessed Sept. 16, 2014, http://www.law.gmu.edu/assets/files/publications/working_ papers/1012ConsumerUseandGovernmentRegulation.pdf. Motorcycles can also be used to secure a title loan in many states.
- Zywicki, “Consumer Use”; and Jim Hawkins, “Credit on Wheels: The Law and Business of Auto-Title Lending,” Washington and Lee Law Review 69, no. 2 (2012), accessed Aug. 25, 2014, http://scholarlycommons.law.wlu.edu/cgi/viewcontent.cgi?article=4272&context=wlulr.
- Center for Responsible Lending, Car-Title Lending (2013), 16, accessed Aug. 25, 2014, http://www.responsiblelending.org/state-oflending/ reports/7-Car-Title-Loans.pdf. The Center for Responsible Lending’s report focused on the 21 states that have a significant presence of high-interest title lending. Additionally, Florida, Minnesota, Ohio, and Oregon have a limited presence of high-interest title lending.
- Pew has published an extensive collection of research about payday lending. See http://www.pewtrusts.org/small-loans.
- Virginia Bureau of Financial Institutions, Motor Vehicle Title Lenders (2014), accessed Aug. 27, 2014, https://www.scc.virginia.gov/bfi/ reg_inst/title.pdf; Virginia Bureau of Financial Institutions, Payday Lender Licensees (2014), accessed Aug. 27, 2014, https://www.scc. virginia.gov/bfi/reg_inst/pay.pdf; and Commisioner of Financial Institutions, “Report of the Commissioner of Financial Institutions, State of Utah” accessed Sept. 8, 2014, http://www.dfi.utah.gov/PDFiles/Annual.PDF. In Virginia, 29 firms make title loans across 470 branches. Seven of those firms are also registered as payday lenders, and 130 of the branches also offer payday loans (28 percent). By comparison, 22 firms make payday loans at 228 branches. In Utah, 47 percent of firms offering title loans also offer payday loans. Texas has 2,254 single-payment title loan locations, accounting for one-quarter of the national market by store count. State regulatory data indicate that about half of these locations report making payday loans as well. Licensee lists from Oregon show that all 43 stores offering title loans in Oregon also offer payday loans.
- New Mexico Regulation and Licensing Department, Financial Institutions Division, Annual Report Regarding Installment Loan Products With APR Greater Than 175% (2013), accessed Aug. 11, 2014, http://www.rld.state.nm.us/uploads/files/FID%202013%20HB337%20Reports. pdf; Texas Office of Consumer Credit Commissioner, Credit Access Business (CAB) Annual Reporting (2013), accessed Aug. 22, 2014, http:// www.occc.state.tx.us/pages/publications/consolidated_reports/CAB/2013%20CAB%20Annual%20CAB%20Report%20by%20 MSA%204-30-2014.pdf; and John Robinson, president of TitleMax Holdings LLC, “Affidavit of John Robinson, President of the Debtors, in Support of First Day Motions and Applications,” 11, April 21, 2009, U.S. Bankruptcy Court for the Southern District of Georgia, Savannah Division, http://s3.documentcloud.org/documents/1227212/tmx-exec-delcaration-in-bk-case.pdf. This affidavit noted that 83 percent of TMX Finance’s portfolio was lump-sum loans. As shown in Map 1, most states do not require loans to be repayable in installments. Even in states such as Texas and New Mexico, which allow both types of loans, 85 percent and 87 percent of loans made are due in a lump sum, respectively.
- For ability to repay, see The Pew Charitable Trusts, Payday Lending in America: How Borrowers Choose and Repay Payday Loans (2013), accessed Aug. 25, 2014, http://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2013/ PewChoosingBorrowingPaydayFeb2013pdf.pdf. For market renewals, see Robinson, “Affidavit of John Robinson,” 7; Tennessee Department of Financial Institutions, “2012 Report on the Title Pledge Industry,” accessed Sept. 16, 2014, http://www.tennessee.gov/tdfi/ compliance/tpl/TDFI%202012%20Report%20Title%20Pledge%20Industry.pdf; and Tennessee Department of Financial Institutions, 34 2014 Report on the Title Pledge Industry (2014), accessed Jan. 14, 2015, http://www.tennessee.gov/tdfi/compliance/tpl/Title%20 Pledge%20Report%202014.pdf. Robinson’s affidavit noted eight renewals on average.
- The Pew Charitable Trusts, “The Post Office and Financial Services” (paper presented at the Financial Services and the Post Office Conference, Washingon, D.C., 2014). Veritec Solutions LLC, Competition Commission Payday Lending Market Investigation (2013), 10–11, accessed Sept. 10, 2014, https://assets.digital.cabinet-office.gov.uk/media/5329df75e5274a2268000357/130310_veritec_solutions_ response_to_is.pdf. “On a sector level, prices are broadly similar because customers are not price sensitive.” “[I]mpediments to shopping around occur because consumers are likely to go ahead with the first lender that approves the individual for a loan rather than seek approval from several firms before choosing the best offer. This behaviour is caused by consumers’ limited ability to access cheaper mainstream finance, and their desire to have the sums delivered to them swiftly.”
- The Pew Charitable Trusts, How State Rate Limits Affect Payday Loan Prices (2014), accessed Jan. 28, 2015, http://www.pewtrusts.org/~/ media/legacy/uploadedfiles/pcs/content-level_pages/fact_sheets/StateRateLimitsFactSheetpdf.pdf.
- Robert B. Avery and Katherine A. Samolyk, “Payday Loans Versus Pawn Shops: The Effects of Loan Fee Limits on Household Use” (2011), accessed Sept. 3, 2014, http://web.law.columbia.edu/sites/default/files/microsites/transactional-studies/files/10PDL_ averysamolykpayday.20110909_0.pdf. The Avery and Samolyk paper explains this process: In states which allow higher prices, lenders compete away excess profits by opening more stores, probably because they do not expect to gain more customers by lowering prices. The high prices seen in the title loan market, combined with relatively low loss rates and little evidence of supernormal profits, indicate that the same phenomenon is occurring.
- Consumer Federation of America and Center for Responsible Lending, “Driven to Disaster” (2013), accessed Aug. 22, 2014, http://www. responsiblelending.org/other-consumer-loans/car-title-loans/research-analysis/CRL-Car-Title-Report-FINAL.pdf; Hawkins, “Credit on Wheels”; Kathryn Fritzdixon, Jim Hawkins, and Paige Marta Skiba, “Dude, Where’s My Car Title?: The Law, Behavior, and Economics of Title Lending Markets” (2013), accessed Aug. 25, 2014, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2224247; Nathalie Martin and Ozymandias Adams, “Grand Theft Auto Loans: Repossession and Demographic Realities in Title Lending,” Missouri Law Review 77 (2012), accessed http://law.missouri.edu/lawreview/files/2013/01/Martin.pdf; and Zywicki, “Consumer Use.”
- Hawkins, “Credit on Wheels”; and TMX Finance, Form 10-K, fiscal year ending Dec. 31, 2012, http://www.secinfo.com/d11MXs.xXad. htm#1stPage. This $1,000 loan size is Pew’s estimate based on state regulatory data where available (California, Idaho, Illinois, New Mexico, Oregon, Tennessee, Texas, and Virginia), industry filings by TMX Finance and EZ Corp., and an average loan size of $1,000 reported by TJD Financial Services to Jim Hawkins in “Credit on Wheels.” Pew’s estimate of $1,200 in fees paid annually is based on revenue and number of customers using data from TMX Finance ($656,755,000 in revenue in 2012 and 470,000 customers, or $1,400 each) and state regulatory data from Texas ($866 per customer using lump-sum title loans and $1,196 per customer using installment title loans). Fees paid annually are probably much higher in a state such as California that has larger title loans, and probably much lower in a state such as Oregon that has smaller title loans. The distribution of loan sizes and amounts spent vary far more in the title loan market than in the payday loan market, owing to wide variation in state laws and the fact that title lenders are generally willing to lend more because the loans are collateralized by vehicles. The amount spent per customer on a given title loan may exceed this figure because title loans are often kept out over more than one calendar year, including renewals. It is not possible from the available data to calculate an average number of months of the year that the median borrower has a title loan outstanding, but the loans’ sizes, costs, and amounts spent per borrower imply that it is about five to six months of the year.
- Average annual percentage rates in states that publish data are: Idaho, 310 percent; Illinois, 212 percent; New Mexico, 270 percent for lump-sum, 314 percent for installment; Oregon, 149 percent; Tennessee, approximately 264 percent; Texas, 306 percent for lump-sum, 223 percent for installment; Virginia, 216 percent. Annual percentage rate is the cost of borrowing for one year. Therefore a loan with an APR of 300 percent (25 percent a month), will carry the same APR regardless of how long it is outstanding, though a borrower’s costs increase proportionately with each month that it remains unpaid. Interest on title loans, like payday loans, does not compound. An average is unavailable in Tennessee, but a majority of loans are made at the legal maximum rate of 22 percent a month, or 264 percent APR.
- This calculation is based on a typical title loan of $1,000 plus a typical fee of $250, divided by the average gross monthly income of a title loan borrower, which is about $2,500.
- The Pew Charitable Trusts, Payday Lending in America: Policy Solutions (2013), 18, accessed Aug. 25, 2014, http://www.pewtrusts.org/~/ media/legacy/uploadedfiles/pcs_assets/2013/PewPaydayPolicySolutionsOct2013pdf.pdf.