CFPB Car Title Loan Study

“About 1 million households use car title loans annually, according to the Federal Deposit Insurance Corp., and the Pew Charitable Trusts figures that consumers spend approximately $3 billion annually in fees.”

“The CFPB car title loan study also found that four-in-five car title loans aren’t repaid in a single payment as intended because the borrowers can’t afford to do so. Instead, those consumers renew their car title loans the day they are due. For more than half of the car title loans, borrowers take out four or more consecutive loans.”

The CFPB car title loan study found that these car title loans often have issues similar to payday loans, including high rates of consumer reborrowing, which can create long-term debt traps. A borrower who cannot repay the initial loan by the due date must re-borrow or risk losing their vehicle. Such reborrowing can trigger high costs in fees and interest and other collateral damage to a consumer’s life and finances. Specifically, the study found that:

• One-in-five borrowers have their vehicle seized by the lender: Single-payment auto title loans have a high rate of default, and one-in-five borrowers have their car or truck seized or repossessed by the lender for failure to repay. This may occur if they cannot repay the loan in full either in a single payment or after taking out repeated loans. This may compromise the consumer’s ability to get to a job or obtain medical care.[Note: This number is highly suspect! How the CFPB determined this percentage is anyone’s guess. For us, it’s closer to 5%.]
• Four-in-five auto title loans are not repaid in a single payment: Auto title loans are marketed as single-payment loans, but most borrowers take out more loans to repay their initial debt. More than four-in-five auto title loans are renewed the day they are due because borrowers cannot afford to pay them off with a single payment. In only about 12 percent of cases do borrowers manage to be one-and-done – paying back their loan, fees, and interest with a single payment without quickly reborrowing.
• More than half of auto title loans become long-term debt burdens: In more than half of instances, borrowers take out four or more consecutive loans. This repeated reborrowing quickly adds additional fees and interest to the original amount owed. What starts out as a short-term, emergency loan turns into an unaffordable, long-term debt load for an already struggling consumer.
  • Vehicle title loans typically have terms of about a month to conform to laws in many states that specify allowable loan terms. For example, at least 8 states—Alabama, Georgia, Idaho, Mississippi, Nevada, New Hampshire, South Dakota, and Tennessee—set a maximum loan term of about 30 days (or one month), although loans can be renewed beyond this initial term.
• Borrowers stuck in debt for seven months or more supply two-thirds of title loan business: Single-payment car title lenders rely on borrowers taking out repeated loans to generate high-fee income. More than two-thirds of title loan business is generated by consumers who reborrow six or more times. In contrast, loans paid in full in a single payment without reborrowing make up less than 20 percent of a lender’s overall business.
  • Single-payment vehicle title loans are available in 20 states. Thirteen states allow lenders to offer both singlepayment and installment vehicle title loans, and five states only allow these loans if they are repayable installments.

“Today, we are releasing our fourth report on this market, which is a study of single-payment auto title loans. Our study analyzed nearly 3.5 million loans made to more than 400,000 borrowers over a period of several years. We examined loan usage patterns, with a focus on the repeated use of these loans, how long it takes borrowers to repay, how often they fall behind, how many borrowers default, and how many have their vehicle seized by the lender. ”

“A typical single-payment auto title loan is taken out by a borrower to cover a cash-flow shortage between paychecks or other income. Borrowers who own their vehicle outright can put up their auto title for collateral in exchange for a loan. If the loan is repaid, the title is returned to the borrower. This credit is costly, as it is typically set at an annualized interest rate around 300 percent. Single-payment auto title loans are available in 20 states; another five states allow only auto title installment loans. ”

“Our report also found that few of these so-called single-payment loans are actually resolved with a single payment. These loans typically have a 30-day term, and most borrowers cannot afford to repay what they owe when the time comes.  In fact, our report found that more than four out of five auto title loans are reborrowed on their due date, rather than paid off. Only about 12 percent of borrowers manage to be one-and-done – paying back their loan, fees, and interest in a single payment without borrowing again soon afterward. ”

“Most borrowers resort to rolling over loans through repeated reborrowing, paying high fees each and every time. More than half of single-payment title loans lead to reborrowing three or more times after their first payment is due, and fully one-third are reborrowed six or more times.”

“In fact, auto title lenders typically generate about two-thirds of their business from the borrowers who end up being mired in debt for most of the year.”

“These loans thus present issues that are similar to those we have found with payday loans. High rates of reborrowing drive up costs, with the consumer eventually paying interest and fees that are far more than they expected. Indeed, for a sizable percentage of borrowers, the fees and interest exceed the amount of the initial loan itself. The Bureau has consistently recognized that consumers may need affordable credit to cover emergency expenses. If the product is structured to make repayment realistic, then such loans may help tide consumers over in their time of need. But if the payments are not affordable, those in a financial jam with nowhere else to turn may find themselves on a perpetual treadmill of debt, laden with mounting costs that disrupt the precarious balance of their financial lives. Although these products are usually marketed for short-term financial emergencies, the long-term costs of such loans often just make a bad situation even worse. ”

Title Loan Business

Like payday loans, vehicle title loans are made by non-depository lenders. The cost is typically expressed in dollars per $100 borrowed, and annual percentage rates (APRs) are in the triple digits. However, there are several key differences between the two products. While the repayment of a payday loan is timed to coincide with a borrower’s payday or other income receipt, car title loans are due in about a month regardless of the borrower’s pay frequency. In addition, instead of giving the lender a post-dated check or authorizing the lender to withdraw payments from a bank account, a vehicle title borrower provides the lender with the title to her car, which generally must be owned free and clear.5 The vehicle’s value is the primary consideration for the amount that can be borrowed. 6 Although the borrower retains use of her car while the loan is outstanding, a lender can repossess and sell the vehicle to satisfy the amount owed if loan payments are not made on time. Because account access is not required, vehicle title borrowers may not have an account with a bank or credit union. Finally, while payday loans are offered both through storefronts and online, vehicle title lending is typically conducted in storefronts so that the lender can assess the vehicle’s condition.

Link to original CFPB Study on car title loan businesses.