Most borrowers who take out a one-time payment car title loan end up borrowing again because they can’t afford to make the payment when due, according to a new federal study.
That’s why much of the auto title business comes from borrowers who end up taking out multiple loans in a row and staying in debt for months, the Consumer Financial Protection Bureau found in a study released Wednesday.
Car title loans are a type of short-term, high-interest loan used by consumers who lack money to pay bills or meet unexpected expenses. The title serves as collateral.
But what may be considered a short-term loan often turns into long-term debt as additional fees and interest are added to the original amount owed, according to the report. Most car title loans are due in 30 days, but in some states they can be due in as little as two weeks.
About one in five auto title borrowers have a car seized for non-payment from a lender, according to the report.
“Collateral damage can be especially severe for borrowers whose car or truck is seized, costing them easy access to their job or doctor’s office,” office manager Richard Cordray said during a briefing. call with reporters.
For its report, the bureau looked at about 3.5 million one-time payment loans issued by non-bank lenders from 2010 to 2013.
One-time payment car title loans, which are repaid with a lump sum payment, are available in 20 states; five other states only allow auto title loans that are repaid in installments, according to the report.
Car title loans are usually based on a percentage of the car’s value, as determined by the lender. The lender holds title to the borrower’s car, truck or motorcycle and returns it when the loan is repaid. The borrower retains use of the vehicle as long as the loan is outstanding, but the lender can repossess it if the borrower does not repay.
The typical car title loan is $700 and the effective annual rate is around 300%, according to the report.
The report found that only 12% of borrowers managed to be “one and done”, meaning they repaid their loans with fees and interest in one payment within 30 days.
Car title loans are similar to payday loans, although they are often for larger sums. They will likely be covered by new payday loan regulations the bureau is expected to come up with in the coming weeks.
Last year, a Pew Charitable Trusts report urged policymakers to enact reforms to make auto title loans less risky, such as adding a requirement that lenders assess a borrower’s ability to repay the loan, based on income and expenses.
The Pew Report found that more than two million people, or about 1% of American adults, use high-interest auto title loans each year.
Borrowers spend about $3 billion a year, or $1,200 each, in fees for loans that average $1,000, Pew found.
Here are some questions and answers about car title loans:
■ Are car title loans used primarily for emergencies?
According to Pew research, only a quarter of borrowers use title loans for unexpected expenses, while half say they use them to pay regular bills.
■ What alternatives are available to borrowers?
Delvin Davis, senior research analyst at the Center for Responsible Lending, said even a high-interest credit card might be a better option than a car title loan. “I would avoid them at all costs,” he said. “Once you’re in, it’s hard to get out.”
The Federal Trade Commission is urging consumers to consider tapping into any savings accounts they may have, or even borrowing from family or friends.
Some credit unions offer “borrow and save” programs, which allow borrowers to take out small loans if they agree to set aside some money in a savings account, to help provide liquidity for future needs.
■ Where can I complain about a car title lender?
If you have a complaint, you can contact your state attorney general’s office. You can also file a complaint with the Consumer Financial Protection Bureau.