Like the idea of paying triple-digit interest rates on a loan, forking out more dough in additional fees and watching the repo man tow away your car? Auto title lenders have got just the thing.
The scenario above is fairly typical, the Consumer Financial Protection Bureau said today in sounding the alarm about car title loans. The regulator looked at 3.5 million car title loans made to some 400,000 borrowers over a three-year period. It found that the average annual percentage rate on these loans to be a punishing 300 percent, nearly as harsh as what borrowers pay for the typical payday loan.
"Our study delivers clear evidence of the dangers auto title loans pose for consumers," said Bureau Director Richard Cordray in statement.
Here, in a nutshell, is how a car title loan works. Faced with a financial emergency or cash crunch, you go to a storefront lender and borrow a few hundred bucks, with the firm holding the title to your car, truck or motorcycle as collateral. The median loan is about $700, according to the CFPB.
If you repay the loan on time, usually about a month later, you get your wheels back. If not, well, better break out that bus schedule -- the lender can repossess and sell the vehicle. That happens to about one in five car title borrowers, the agency reported.
Instead of defaulting and risking the loss of their main means of transportation, four in five borrowers end up repeatedly renewing their loans to repay the debt. Only in about 12 percent of cases do people manage to repay the loan when it is initially due. As a result, the typical borrower will spend $1,200 in fees annually for a $1,000 loan, Pew said in a 2015 report.
"The typical auto title loan payment consumes 50 percent of an average borrower's paycheck, which helps explain why so many borrowers return almost immediately for another loan to make ends meet," said Nick Bourke, director of Pew's small-dollar loans project, by email. "By comparison, research shows that most borrowers can afford monthly payments of no more than 5 percent of their income."
Roughly two million Americans use car title loans every year, according to Pew. A total of 25 U.S. states allow some form of these loans, although their costs can vary widely because of differing limits on loan sizes, fees and duration.
The CFPB is expected later this month to propose significantly more stringent rules for payday and vehicle title loans.