Auto-title loans are very common non-bank loans in which borrowers use their cars as collateral for the loan. A new report, Driven to Disaster: Car-Title Lending and Its Impact on Consumers, by the Center for Responsible Lending (CRL) and the Consumer Federation of America (CFA), reveals the predatory nature of auto-title lending, and just how damaging such loans can be for consumers. According to the report, borrowers pay $3.6 billion each year in interest on $1.6 billion in loans, renewing such loans an average of 8 times and paying $2,142 in interest on a $952 loan.
Auto-title loans are asset-based loans, meaning that lenders make the loan based on the value of the collateral rather than the ability of the borrower to repay the loan. According to the report, there are 7,730 car-title lenders across the county. Like all alternative financial services (AFS), auto-title loans are mainly used by people outside of the financial mainstream—the un- and underbanked. About half of car-title borrowers are unbanked, and the average borrower is more likely than the average U.S. resident to earn less than $30,000, be unmarried, have less than a high school degree, rent a home, and be a foreign-born Spanish speaker.
Compared to payday loans, it appears that car-title loans may be even more damaging to consumers. According to research form the Pew Charitable Trust, the average payday loan borrower takes out 8 loans of $375 each per year and spends $520 on interest. Twelve million Americans use payday loans annually, spending a total of $7.4 billion. Yet while the payday lending market is much larger than the car-title loan market (12 million payday loan borrowers compared to 1.7 million car-title loan borrowers), the car-title loan market earns more money in annual interest than the payday loan market ($3.6 billion auto-title loan interest compared to $3.3 billion payday loan interest) since car-title loans are typically much larger than payday loans. In addition, whereas payday loans damage borrowers’ credit and could cause additional indebtedness through bank overdraft fees, car-title loans often result in borrowers’ cars being repossessed. According to the report, 1 in 6 borrowers had their cars repossessed. Not only does repossession impact many borrowers’ ability to work, since their transportation is gone, but the value of the car that is repossessed is significantly higher than the value of the original loan (on average loans were 26% of the value of the car). To add insult to injury borrowers are then hit with $350 to $400 repossession fees, which put them in even more debt.
Just as with payday lending, the legislative landscape for auto-title lending varies across states. While 38 states have specific statutes that allow for payday lending, only 21 states explicitly authorize car-title loans, 17 of which allow for triple-digit annual percentage rates (APRs). Even in certain states that have laws against usurious car-title loans such as Kansas, South Carolina, and Louisiana, the report points out how easy it is to get around these laws.
On the federal level, in March of last year the Consumer Financial Protection Bureau (CFPB) launched its complaint database for auto loans with large banks; however, complaints involving small banks or nonbanks are still referred to other federal agencies with the authority to handle such complaints. More recently, in March the CFPB released a bulletin explaining that certain lenders that offer auto loans through dealerships are responsible for unlawful, discriminatory pricing. The bulletin provides guidance to indirect auto lenders within the CFPB’s jurisdiction on how to address fair lending risks. According to the CFPB, it will closely review the operations of both depository and nondepository indirect auto lenders, utilizing all appropriate regulatory tools to assess whether supervisory, enforcement, or other actions may be necessary to ensure that the market for auto lending provides fair, equitable, and nondiscriminatory access to credit for consumers. While neither of these actions addresses car title lending directly, the CFPB has previously indicated that auto-title lending is among its priorities.
In order to end predatory lending that preys on the underserved, we need a two-pronged approach consisting of laws that restrict predatory lending on both the state and federal level and continued efforts by both the CFPB and states ensure consumers are not driving down dangerous roads by using auto-title loans.