Borrowers Have Difficulty Paying One-Time Car Title Loans

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One in five borrowers on a single payment car loan have their car or truck seized by the lender for non-repayment of their debt.

More than 4 out of 5 of these types of loans are renewed on their due date because borrowers cannot afford to repay them in one installment.

And more than two-thirds of auto credit business comes from borrowers who end up with 7 or more consecutive loans and remain in debt for 7 months or more.

These are some of the findings of a large-scale auto loan study released Wednesday by the Consumer Financial Protection Bureau.

Low cost and high cost loans

Car title loans are low cost, high cost loans that borrowers use to cover an emergency or a lack of cash between paychecks. Borrowers use their car, truck or motorcycle as collateral, and the lender holds the title in exchange for the loan amount.

The typical loan is around $ 700 and the typical annual percentage rate is around 300%, much higher than most forms of credit, according to the CFPB.

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For auto title loans covered in the CFPB report, a borrower agrees to pay the full amount owed in a lump sum, plus interest and fees, by a certain day. These single payment car title loans are available in 20 states; 5 other states only allow auto loans repayable in installments.

States that offer auto title loans

According to the Pew Charitable Trusts, one-off auto title loans are offered in:

  • New Hampshire
  • Delaware
  • Ohio
  • Tennessee
  • Alabama
  • Mississippi
  • Georgia
  • Florida
  • Louisiana
  • Missouri
  • Wisconsin
  • Minnesota
  • Texas
  • New Mexico
  • South Dakota
  • Arizona
  • Utah
  • Nevada
  • Idaho
  • Oregon

Installment loans are available in California, Kansas, Illinois, South Carolina, and Virginia.

400,000 borrowers studied

The CFPB reviewed nearly 3.5 million single payment and car title loan files from non-bank lenders of 400,000 borrowers from 2010 to 2013.

Only 12% of borrowers repaid their loan at the end of the first installment. Most borrowers have struggled to get off the “debt conveyor belt,” says CFPB director Richard Cordray.

It is worse if the borrowers’ vehicles are repossessed. “They can’t get to work or the doctor,” Cordray says.

Nick Bourne, director of the Pew Small Loans Project, explains that the financial impact of high lending rates coupled with the borrower’s low income confines this person to a long cycle of debt.

“The typical payment on an auto title loan consumes 50% of an average borrower’s salary, which is why so many borrowers almost immediately come back for another loan to make ends meet,” says Bourne. “By comparison, research shows that most borrowers can afford monthly payments of no more than 5% of their income. “

The CFPB also studies installment loans, but they are not part of this report.

The office is studying the rules for payday loans, and car title loans will be part of that regulation, said Jesse Leary, CFPB section chief for the research office.

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Industry opposes CFPB

Pamela Banks, senior policy adviser for Consumers Union, says she hopes the CFPB will institute guarantees for consumers.

She suggests getting lenders to do a more rigorous assessment of potential borrowers and extending the loan term from 2 weeks or one month to 90 days. It would also establish a standard of reasonableness for fees.

“Putting the spotlight on her is something that had to happen,” Banks said. “(Car title loans) aren’t good in the way they’re structured now. “

In the CFPB study, the agency found that some borrowers were allowed to repay part of their car loan before rolling it over. In these cases, borrowers who have successfully repaid their loans may have reduced their loan amount over time, explains Leary.

In February, a representative from a commercial payday lending organization expressed opposition to further regulation of the industry.

“The CFPB has approached the complex problem of regulating payday lenders, as well as securities and installment lenders, from a perspective that sees the market as an industry creation rather than a response to the demand from consumers who need short-term, low-value loans, ”said Dennis Shaul, CEO of the Community Financial Services Association of America.

“Unless the CFPB changes that perspective, these consumers could lose a vital option in the face of such crises,” he said.

$ 3.9 billion in car title loan fees

In addition to the CFPB report, the Center for Responsible Lending released its own report this week which found that consumers lose $ 8 billion in fees for payday loans and auto loans each year. Of this amount, auto title loans account for $ 3.9 billion in fees each year.

Usually sold to consumers with an average income of $ 25,000, these loans come with fees that let most borrowers renew rather than withdraw the loans, according to the center’s report.

These multibillion dollar fees do not take into account additional fees such as late fees, bounced payments, or other penalties imposed by lenders. The charges for these types of charges would be additional.

“Payday loans and car title loans are marketed as an injection of money for people in financial difficulty. In reality, these loans typically drain hundreds of dollars from a person’s bank account for amounts well in excess of the original loan amount, ”the report states.

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