One in five consumers that takes out a single-payment auto title loan has his vehicle seized by the lender for failing to repay the debt, according to a study released by the Consumer Financial Protection Bureau today. The study also found that four out of five of these loans are renewed the day they are due because borrowers cannot afford to repay them with a single payment.
“Our study delivers clear evidence of the dangers auto title loans pose for consumers,” Director Richard Cordray said in a press release. “Instead of repaying their loan with a single payment when it is due, most borrowers wind up mired in debt for most of the year. The collateral damage can be especially severe for borrowers who have their car or truck seized, costing them ready access to their job or the doctor’s office.”
The typical auto title loan — small-dollar loans borrowers typically use to cover an emergency or other cash-flow shortage between paychecks — is $700 with an annual interest rate of about 300%, according to the CFPB. For the auto title loans covered in the CFPB’s report, a borrower agrees to pay the full amount owed in a lump sum plus interest and fees by a certain day.
The bureau’s report examined 3.5 million anonymized, single-payment auto title loan records from nonbank lenders from 2010 through 2013, and analyzed loan use patterns, such as re-borrowing and rates of default. Key findings also included that “more than half of auto title loans become long-term debt burdens, and that borrowers stuck in debt for seven months or more supply two-thirds of the title loan business.” Read the full report here.
Single-payment vehicle title loans are available in 20 states. Thirteen states allow lenders to offer both single-payment and installment vehicle title loans, and five states only allow these loans if they are repayable in installments, according to the CFPB.